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##### capital structure

**Description**

solution

**Question**

hen analysts use the term ?capital structure,? what are they referring to?;2. Why does capital structure affect the market value of a firm?;3. Define ?total risk? as it is used in capital structure theory. How is total risk measured?;4. The forecast for your firm indicates there's a 20% chance that Net Income will be $20,000, a 60% chance it will be $30,000, and a 20% chance it will be $40,000.;a. Given these conditions, what is the expected Net Income for your firm next year?;b. Given these conditions and your answer to part a, what is the standard deviation of the Net Income estimate?;c. Given your answers to parts a & b, what is the coefficient of variation (CV) of the net income estimate?;5. What?s the difference between business risk and financial risk?;6. Assume your firm is zero-growth and pays all its net income in dividends each year Also assume your firm can borrow money when it needs to at an interest rate of 6%. Currently your firm?s cost of equity (Rs) is 9%, but if any money is borrowed that cost will rise to 10%. Sales this year are expected to be $600,000 and operating costs are expected to be $500,000. Your firm?s effective tax rate is 40%. Given these conditions, what is the current value of your firm? What will be the new value of your firm if it takes on $200,000 in debt?;End of assignment questions;(see answers to numerical problems below);Answers to numerical problems;Question 4a: $30,000;Question 4b: $6,325;Question 4c: 21%;Question 6: $728,000

Paper#28456 | Written in 18-Jul-2015

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