F. Pierce Products Inc.,is considering changing its capital structure. F. Pierce
ID: 2704548 • Letter: F
Question
F. Pierce Products Inc.,is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shiel. Its investment banker has indicated that the pre-tax cost debt under various possible capital structures would be as follows.
Market debt to value ratio market equity to value ratio Market Debt to value ratio Before tax Cost of debt
0.0 1.0 0.00 6.0%
0.2 0.8 0.25 7.0%
0.4 0.6 0.67 8.0%
0.6 0.4 1.50 9.0%
0.8 0.2 4.00 10.0%
Explanation / Answer
0.8 0.2 4.00 10.0%
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