1.Martin Corporation is financed with 40% debt and 60% common equity. The after-tax cost of debt is 6% and the cost of common equity is 9%. What is Martin’s weighted average cost of capital?

2.Martin is considering increasing its debt load and is contemplating a 50% debt and 50% common equity mix. If they do this, what should happen to the cost of debt (not the weighted cost – but the cost of each component)? The cost of equity (not the weighted cost)? Why?

3.Assume that the restructuring is completed, and Martin is now 50% debt and 50% common equity. The after-tax cost of debt is 8% and the cost of common equity is 10%. What is Martin’s new weighted average cost of capital?

4.Should Martin make the capital structure change mentioned in the prior problem?

5.Instead, assume that the restructuring is completed, and Martin is now 50% debt and 50% common equity. But the after-tax cost of debt is 7% and the cost of common equity is 9.5%. What is Martin’s new weighted average cost of capital?

6.Now, should Martin make the capital structure change mentioned in the prior problem?

7.For a given profitable corporation (that pays taxes), what is the least expensive form of capital (between debt and common equity)? Why? Please state two reasons.

8.What is usually higher the weighted average cost of capital for a corporation or the marginal weight average cost of capital?

9.Describe two variables that would influence a firm optimal capital structure.

10. Would you expect firms in different industries to have the same level of debt in their optimal capital structure range – why or why not?

Answer rating: 100% (QA)

0406 06009 78 Both the cost of debt and cost of equity will increase for the reason the expected ban... View the full answer