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Unformatted text preview: costs of debt for the firm at different capital structures: % Financed With Debt r d 0% --- 20 8.0% 30 8.5 40 10.0 50 12.0 If the company were to recapitalize, debt would be issued, and the funds received would be used to repurchase stock. PizzaPalace is in the 40 percent state-plus-federal corporate tax bracket, its beta is 1.0, the risk-free rate is 6 percent, and the market risk premium is 6 percent. a. Provide a brief overview of capital structure effects. Be sure to identify the ways in which capital structure can affect the weighted average cost of capital and free cash flows. Answer: The basic definitions are: (1) V = Value Of Firm (2) FCF = Free Cash Flow (3) WACC = Weighted Average Cost Of Capital (4) r s And r d are costs of stock and debt (5) w ce And w d are percentages of the firm that are financed with stock and debt. The impact of capital structure on value depends upon the effect of debt on: WACC and/or FCF....
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- Spring '08