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

question 170

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 of 40 percent on ordinary income. The number of common shares outstanding for each of the capital structures would be ________.

• A) 30 percent debt ratio: 30,000 shares and 50 percent debt ratio: 50,000 shares
• B) 30 percent debt ratio: 50,000 shares and 50 percent debt ratio: 70,000 shares
• C) 30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 100,000 shares
• D) 30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 50,000 shares

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Definitions:

Interest Rate

The percentage of a sum of money charged for its use, typically expressed on an annual basis, affecting loans, mortgages, savings, and investments.

Discounted Cash Flow

A technique for determining the value of an investment by considering the future cash flows it is projected to generate, factoring in the time value of money.

Present Value

Today's worth of a single sum or series of future cash flows, discounted at a particular rate of return.

Future Cash Flow

The amount of money that is expected to be received or paid out by an entity in the future, often considered for investment or project valuations.