Question 3

a) In each of the theories of capital structure the cost of equity rises as the amount of debt increases. So why dont financial managers use as little debt as possible to keep the cost of equity down? After all, isnt the goal of the firm to maximize share value and minimize shareholder

b) Country Markets has an unlevered cost of capital of 12 percent, a tax rate of 38 percent, and expected earnings before interest and taxes of $15,700. The company has $12,000 in bonds outstanding that have a 6 percent coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity?