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Terms in this set (17)Sets with similar termsSets found in the same folderOther sets by this creatorVerified questionsQUESTION Elliott Athletics is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred stock in its capital structure, and it does not plan to do so in the future. Its treasury staff has consulted with investment bankers. On the basis of those discussions, the staff has created the following table showing the firm’s debt cost at different debt levels: $$ \begin{matrix} \text{Debt-to-Capital Ratio }{\left(\mathbf{w}_{\mathbf{d}}\right) } & \text{Equity-to Capital Ratio }{\left(\mathbf{w}_{\mathbf{c}}\right)} & \text{Debt-to-Equity Ratio (D/E)} & \text{Bond Rating} & \text{Before-Tax Cost of Debt }{\left(\mathbf{r}_{\mathrm{d}}\right)}\\ \text{0.0} & \text{1.0} & \text{0.00} & \text{A} & \text{7.0\\%}\\ \text{0.2} & \text{0.8} & \text{0.25} & \text{BBB} & \text{8.0}\\ \text{0.4} & \text{0.6} & \text{0.67} & \text{BB} & \text{10.0}\\ \text{0.6} & \text{0.4} & \text{1.50} & \text{C} & \text{12.0}\\ \text{0.8} & \text{0.2} & \text{4.00} & \text{D} & \text{15.0}\\ \end{matrix} $$ Elliott uses the CAPM to estimate its cost of common equity, rs, and estimates that the risk-free rate is 5%, the market risk premium is 6%, and its tax rate is 40%. Elliott estimates that if it had no debt, its “unlevered” beta, $b_{U}$, would be 1.2. a. What is the firm’s optimal capital structure, and what would be its WACC at the optimal capital structure? b. If Elliott’s managers anticipate that the company’s business risk will increase in the future, what effect would this likely have on the firm’s target capital structure? c. If Congress were to dramatically increase the corporate tax rate, what effect would this likely have on Elliott’s target capital structure? d. Plot a graph of the after-tax cost of debt, the cost of equity, and the WACC versus (1) the debt/capital ratio and (2) the debt/equity ratio. Verified answer Other Quizlet setsRelated questionsWhich type of data is collected specifically for the research problem at hand?Primary data is data collected specifically for the research at hand by the researcher or company conducting the research. It is obtained from a source or a population of people within a specific demographic. Secondary data is collected by someone else at an earlier time for later use.
Why is secondary data collected before primary data?Collecting secondary data for research is much faster and easier than primary data collection. This allows researchers to save time by going straight to the analysis process.
Is are a type of secondary data in which the data collected and or the process of collecting the data are standardized for all users?Standardized information is a type of secondary data in which the data collected and/or the process of collecting the data are standardized for all users.
Which of the following would be considered secondary data collection?Sources of secondary data include books, personal sources, journals, newspapers, websitess, government records etc. Secondary data are known to be readily available compared to that of primary data.
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Data collected specifically for a particular research project at hand is known as secondary data
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