5. The relationship between a firm's capital structure and othercompany attributes Corporations allowed to deduct interest payments as an expense. Corporations allowed to deduct dividend payments to stockholders as an expense. The differential tax treatment of interest payments and dividend payments encourages firms to use capital structure. Debt financing is expensive than common or preferred stock financing. In their Green Goose Automation Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The firm's unlevered beta is 1.25, and its cost of equity is 13.00%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 13.00%. The risk-free rate of interest (rap) is 3%, and the market risk premium (RP) is 8%. Green Goose's marginal tax rate is 30% Green Goose is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial Information that follows to analyze its weighted average cost of capital (WACC). Complete the following table. D/Cap Ratio 0.0 E/Cap Ratio Bond Rating Before-Tax Cost of Debt (ra) D/E Ratio Levered Beta (b) 1.25 Cost of Equity 13.00% WACC 13.00% 1.0 0.00 0.2 0.8 0.25 14.752% 12.978% 8.4% 8.9% 0.4 0.6 0.67 BBB 1.833 17.664% 0.6 0.4 1.50 BB 11.1% 2.563 14.064% 0.8 0.2 14.39 4.750 41.000 5. The relationship between a firm's capital structure and othercompany attributes Corporations allowed to deduct interest payments as an expense. Corporations allowed to deduct dividend payments to stockholders as an expense. The differential tax treatment of interest payments and dividend payments encourages firms to use capital structure. Debt financing is expensive than common or preferred stock financing. In their Green Goose Automation Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The firm's unlevered beta is 1.25, and its cost of equity is 13.00%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 13.00%. The risk-free rate of interest (rap) is 3%, and the market risk premium (RP) is 8%. Green Goose's marginal tax rate is 30% Green Goose is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial Information that follows to analyze its weighted average cost of capital (WACC). Complete the following table. D/Cap Ratio 0.0 E/Cap Ratio Bond Rating Before-Tax Cost of Debt (ra) D/E Ratio Levered Beta (b) 1.25 Cost of Equity 13.00% WACC 13.00% 1.0 0.00 0.2 0.8 0.25 14.752% 12.978% 8.4% 8.9% 0.4 0.6 0.67 BBB 1.833 17.664% 0.6 0.4 1.50 BB 11.1% 2.563 14.064% 0.8 0.2 14.39 4.750 41.000
