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

---

Definitions:

Concessions

Compromises or allowances made by one party in negotiations, often in order to reach an agreement.

Break Off Negotiations

The act of ending discussions or negotiation processes, often abruptly, due to unresolved differences or unsatisfactory progress.

Consistent Message

A communication approach where the information conveyed remains uniform across different mediums and over time, reinforcing a specific viewpoint or piece of information.

Negotiator Power

The ability of a negotiator to influence the behavior or decision-making of another party in a negotiation.