Ron Inc., who has an applicable 30% corporate tax as stated on its BIR tax registration form, is trying to determine its optimal capital structure. The company's capital structure consists of bonds and common stock. The following are the Capital Structure options: Capital Structure Debt to Equity Before-tax Equity Ratio options Ratio cost of debt Cs1 60% 67% 7.50% CS2 50% 100% 8.50% CS3 45% 122% 9.00% The company uses the CAPM to estimate its cost of ordinary or common equity. Ron Inc. estimates that its beta would be 1.0 if it has no debt. The risk-free rate is 3% and the market rate of return on average stock market is 8%.

Ron Inc., who has an applicable 30% corporate tax as stated on its BIR tax registration form, is trying to determine its optimal capital structure. The company's capital structure consists of bonds and common stock. The following are the Capital Structure options: Capital Structure Debt to Equity Before-tax Equity Ratio options Ratio cost of debt Cs1 60% 67% 7.50% CS2 50% 100% 8.50% CS3 45% 122% 9.00% The company uses the CAPM to estimate its cost of ordinary or common equity. Ron Inc. estimates that its beta would be 1.0 if it has no debt. The risk-free rate is 3% and the market rate of return on average stock market is 8%.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 4P

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