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Discuss the capital structure of the firm.

A firm has no outstanding debt and a total market value of $200,000. Earnings before interest and taxes (EBIT) are projected to be $25,000 if economic conditions are normal. If there is a strong expansion, EBIT is expected to increase to $35,000, and if there is a recession the firm EBIT is expected to decline to $10,000. The firm is considering a $70,000 debt issue with a 6 percent interest rate, where the proceeds will be used to repurchase shares of stock. There are currently 4,000 shares outstanding. Ignore taxes.

What conclusions can you draw from this example regarding the use of debt (financial leverage) in a firm capital structure?

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M9162683

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