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

question 161

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. 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: $105,000 and 50 percent debt ratio: $225,000
• 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: $135,000 and 50 percent debt ratio: $175,000

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Definitions:

CFCs

Chlorofluorocarbons, a class of chemical compounds used in refrigeration, air conditioning, and aerosol propellants, known to contribute to ozone depletion.

Troposphere

The lowest layer of Earth's atmosphere where most of the planet's weather occurs, extending up to about 10 km above the surface.

Chemically Unreactive

Describes substances that do not easily undergo chemical reactions or change their chemical structure in the presence of other substances.

Reflectivity

The measure of the proportion of light or radiation that is reflected by a surface, often impacting climate and temperature.