A Firm Is Analyzing Two Possible Capital Structures-30 and 50

question 95

Multiple Choice

A firm is analyzing two possible capital structures-30 and 50 percent debt ratios. The firm has total assets of $5,000,000 and common stock valued at $50 per share. The firm has a marginal tax rate of40 percent on ordinary income. If the interest rate on debt is 7 percent and 9 percent for the 30 percent and the 50 percent debt ratios, respectively, the amount of interest on the debt under each of the capital structures being considered would be

• A) 30 percent debt ratio: $135,000 and 50 percent debt ratio: $175,000.
• B) 30 percent debt ratio: $245,000 and 50 percent debt ratio: $225,000.
• C) 30 percent debt ratio: $105,000 and 50 percent debt ratio: $250,000.
• D) 30 percent debt ratio: $105,000 and 50 percent debt ratio: $225,000.

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Definitions:

Collateral

Property or assets pledged as security for a loan, which can be seized by the lender if the loan is not repaid.

Defaulted On The Loan

A situation in which a borrower fails to make the agreed-upon payments on a loan within the specified time, leading to a breach of the loan agreement.

Security Interest

A legal claim or right granted to a creditor over the debtor's assets as collateral for a loan.

Monthly Payments

Regular payments made once a month, often in the context of loans, rent, or subscriptions.