Given the following, determine the firm’s optimal capital structure: Debt/Assets After-Tax Cost of Debt Cost of Equity 0 % 7 % 11 % 10 7 11 20 7 11 30 8 12 40 9 14 50 10 15 60 13 16 Round your answers for capital structure to the nearest whole number and for the cost of capital to one decimal place. The optimal capital structure: % debt and % equity with a cost of capital of % If the firm were using 20 percent debt and 80 percent equity, what would that tell you about the firm’s use of financial leverage? Round your answer for the cost of capital to one decimal place. If the firm uses 20% debt financing, it would be using financial leverage. At that combination the cost of capital is %. The firm could lower the cost of capital by substituting . What two reasons explain why debt is cheaper than equity? Debt is cheaper than equity because interest expense . In addition, equity investors bear risk. If the firm were using 20 percent debt and 80 percent equity and earned a return of 9.0 percent on an investment, would this mean that stockholders would receive less than their required return of 11.0 percent? If the firm earns 9.0% on an investment, the stockholders will earn than their required 11.0%. What return would stockholders receive? Round your answer to one decimal place. %
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Problem 21-05
- Given the following, determine the firm’s optimal capital structure:
Debt/Assets After-Tax Cost of Debt Cost of Equity 0 % 7 % 11 % 10 7 11 20 7 11 30 8 12 40 9 14 50 10 15 60 13 16 Round your answers for capital structure to the nearest whole number and for the cost of capital to one decimal place.
The optimal capital structure: % debt and % equity with a cost of capital of %
- If the firm were using 20 percent debt and 80 percent equity, what would that tell you about the firm’s use of financial leverage? Round your answer for the cost of capital to one decimal place.
If the firm uses 20% debt financing, it would be using financial leverage. At that combination the cost of capital is %. The firm could lower the cost of capital by substituting .
- What two reasons explain why debt is cheaper than equity?
Debt is cheaper than equity because interest expense . In addition, equity investors bear risk.
- If the firm were using 20 percent debt and 80 percent equity and earned a return of 9.0 percent on an investment, would this mean that stockholders would receive less than their required return of 11.0 percent?
If the firm earns 9.0% on an investment, the stockholders will earn than their required 11.0%.
What return would stockholders receive? Round your answer to one decimal place.
%
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