Harry Trading Company Must Choose Its Optimal Capital Structure

question 166

Multiple Choice

Harry Trading Company must choose its optimal capital structure. Currently, the firm has a 20 percent debt ratio and the firm expects to generate a dividend next year of $5.44 per share. Dividends are expected to remain at this level indefinitely. Stockholders currently require a 12.1 percent return on their investment. Harry is considering changing its capital structure if it would benefit shareholders. The firm estimates that if it increases the debt ratio to 30 percent, it will increase its expected dividend to $5.82 per share. Again, dividends are expected to remain at this new level indefinitely. However, because of the added risk, the required return demanded by stockholders will increase to 12.6 percent. Based on this information, should Harry make the change?

• A) Yes, since the value of the firm will increase by $1.23 per share.
• B) No, since the value of the firm will decrease by $1.23 per share.
• C) Yes, since the value of the firm will increase by $0.25 per share.
• D) No, since the value of the firm will decrease by $0.25 per share.

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Definitions:

Imipramine

A tricyclic antidepressant used to treat major depression and sometimes neuropathic pain.

Urinary Retention

The inability to completely or partially empty the bladder, which can lead to discomfort or complications.

Hazardous Side Effects

Unintended and potentially dangerous reactions caused by medication or treatments that can pose significant health risks to the patient.

Tyramine-Restricted Diet

A diet that limits the intake of tyramine, a substance found in certain foods, to prevent adverse reactions, particularly in individuals taking certain medications like monoamine oxidase inhibitors (MAOIs).