14 Case model - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17...

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14 Case model 3/22/2010 7:09 2/21/2006 Chapter 14. Capital Structure and Leverage PART C Total Assets for both firms $20,000 Tax rate for both firms 40% Debt ratio for Firm U 0% Debt ratio for Firm L 50% Cost of debt for Firm L 12% FIRM U FIRM L ASSETS $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 EQUITY $20,000 $20,000 $20,000 $10,000 $10,000 $10,000 PROBABILITY 0.25 0.50 0.25 0.25 0.50 0.25 SALES $6,000 $9,000 $12,000 $6,000 $9,000 $12,000 OPER. COSTS 4,000 6,000 8,000 4,000 6,000 8,000 EBIT $2,000 $3,000 $4,000 $2,000 $3,000 $4,000 INTEREST EXPENSE 0 0 0 1,200 1,200 1,200 EBT $2,000 $3,000 $4,000 $800 $1,800 $2,800 TAXES (40%) 800 1,200 1,600 320 720 1,120 NET INCOME $1,200 $1,800 $2,400 $480 $1,080 $1,680 BEP 10.0% 15.0% 20.0% 10.0% 15.0% 20.0% ROE 6.0% 9.0% 12.0% 4.8% 10.8% 16.8% TIE 1.7 2.5 3.3 E(BEP) 15.0% 15.0% E(ROE) 9.0% 10.8% E(TIE) 2.5 SD(BEP) 3.5% 3.5% SD(ROE) 2.1% 4.2% SD(TIE) 0 0.6 PART D The cost of debt at dif erent debt levels : Amount D / A D / E Bond B-T Borrowed Ratio Ratio Rating $0 0.0000 0.0000 - - $250,000 0.1250 0.1429 AA
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This note was uploaded on 03/21/2010 for the course BUSINESS AB102 taught by Professor Woo during the Spring '10 term at Nanzan.

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