Refer to the observed capital structures given in Table 15.3 of the text. What do you notice about the types of industries with respect to their average debt-equity ratios? Are certain types of industries more likely to be highly leveraged than others? What are some possible reasons for this observed segmentation? Do the operating results and tax history of the firms play a role? How about their future earnings prospects? Explain.
Answer to relevant QuestionsMaslyn Corp. has an EBIT of $740,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 14 percent, and the corporate tax rate is 35 percent. The company also has a perpetual ...How does the life cycle of a company help explain dividend payments? What evidence is there to suggest that the company’s life cycle, at least in part, explains dividend payments? As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of ...In the previous problem, suppose the company instead decides on a five-for-one stock split. The firm’s 80-cent per share cash dividend on the new (post-split) shares represents an increase of 10 percent over last year’s ...In the previous problem, assume the risk-free rate is only 5 percent. What is the risk-neutral value of the option now? What happens to the risk-neutral probabilities of a stock price increase and a stock price decrease?
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