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150 million if the overall economy expands. 150 million if the economy expands. 100 million of collateral. The taxes rate is 30%. Both companies spend all available profits as dividends. If there is a recession, compare dividends and total distributions to investors for every company. Cheshire Corporation is now financed 100% with equity.
- CapitaCommercial Trust
- Including bonds, shares, derivatives, currency (responsibility of the central bank or investment company)
- Health savings account deduction
- Continue with the pension plan of your earlier employer
- 4 % 10 %
The cost of equity is 15%. Cheshire is considering a proposal to borrow enough money at 7% to buy back half of its common stock. It could then be financed 50% with debts and 50% with collateral. Assume that this does not have an effect on the price of equity. Cheshire’s taxes rate is 40%. What is Cheshire’s cost of capital without and with the stock repurchase? Answer: When managers aren’t major shareholders of the company, their self-interest might not coincide with the interests of shareholders.
Managers may avoid dangerous but potentially rewarding proposals and the excess work and scrutiny that include raising outside capital. Briefly clarify the actual empirical proof suggests about financial managers’ actions as they relate to the capital structure theory. Answer: Capital structure theory predicts that managers will add a personal debt to the administrative center structure when current leverage is below the firm’s ideal selection of leverage to use at the bottom of the overall cost of capital curve. Survey research shows that using managers only go directly to the debt marketplaces after internal money have been fatigued. This is unexpected as the cost of internal collateral is greater than that of the expense of debt.
There are two explanations why this is going on. The most obvious reason for this behavior is that using inner funds minimizes the trouble to managers and constraints on the behavior that may come with issuing debt. The other probability is that managers do not actually try to minimize the WACC.
15.3 Why Do Capital Structures Differ across Industries? The business is actually risky with unpredictable cash moves. The threat of bankruptcy would make customers reluctant to choose the company’s products. Which of the next is a good reason behind an ongoing company to have greater than average debts ratios? The company’s cash flows are difficult to predict. The company produces little taxable income.
Customer support is an important aspect of the business’s business. The company faces high marginal taxes rates. U. S. companies vary very little in their capital buildings. Companies faced with higher tax burdens are likely to use more debt. Conservative balance sheets might be advantageous for companies that have long-term relationships with their customers. Top management’s desire to avoid the scrutiny that comes with higher degrees of debt may influence the capital structures of some firms. List and briefly clarify at least two important reasons why capital structures tend to differ between sectors and even companies within the same industry. Answer: There are several reasons why firms use pretty much personal debt in their capital structure.