Use the model in the File C12 to work this problem.
a. Refer back to Problem. Now assume that the debt ratio is increased to 65 percent, causing all interest rates to rise by 1 percentage point, to 10 percent, 12 percent, and 14 percent, and causing g to increase from 5 to 6 percent. What happens to the MCC schedule and the optimal amount of investment?
b. Assume the facts as in part (a), but suppose Ezzell’s marginal tax rate falls (1) to 20 percent or (2) to 0 percent. How would this affect the MCC schedule and the optimal investment?
c. Ezzell’s management would now like to know what the optimal investment would be if earnings were as high as $3.25 million or as low as $1 million. Assume a 40 percent marginal tax rate.
d. Would it be reasonable to use the model to analyze the effects of a change in the payout ratio without changing other variables?

  • CreatedNovember 24, 2014
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