Feldspar Inc

question 41

Multiple Choice

Feldspar Inc.is considering the capital structure for a new division.Management has been given the following cost information:

Based on this information, what capital structure (debt/asset ratio) should management accept? Assume the marginal tax rate is 40%.

• A)40% has lowest cost of capital
• B)50% has lowest cost of capital
• C)60% has lowest cost of capital
• D)70% has lowest cost of capital

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Definitions:

Interest Paid

The amount paid by a borrower to a lender for the privilege of using borrowed money, typically expressed as an annual percentage of the loan outstanding.

Bond Discount

The gap between the nominal value of a bond and the price it fetches on the market when it is sold for an amount lower than its nominal value.

Straight-Line Amortization

A method of systematically reducing the cost value of an intangible asset over its useful life by charging equal expense amounts to each accounting period.

Effective-Interest Method

A method of calculating the interest expense on a bond or loan by applying the constant interest rate to the outstanding balance of the debt for each period.