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Ouestion 39 The optimal capital structure for firms in cyclical industries should contain than firms in stable industries Not yet answered Points out of 1 Select one O Amore debt Flag question O B
Ouestion 39 The optimal capital structure for firms in cyclical industries should contain than firms in stable industries Not yet answered Points out of 1 Select one O Amore debt Flag question O B. less debt C. an equal amount of debt OD. none of the above. There is no relationship between the cyclical nature of an industry and optimal capital structure, Outston 40 Not yet The coupon rate on an issue of debt is 12%. The yield to maturity on this issue is 14%. The corporate tax rate is 31%. What would be the approximate after-tax cost of debt for a new issue of bonds? answered Points out of 1 Select one: A.4.34% P Rag question 8.3.72% O C 9.66% O D. 8.28%
Expert Solution
1. Less debt
The higher the debt-to-equity ratio, the more sensitive a company is to the business risk created by cyclical industries. For this reason, firms in highly cyclical industries will want to have a low debt-to-equity ratio at all times to manage through cycles when compared to stable industries.
2. after tax cost of debt=yield to maturity*(1-tax rate)=14%*(1-31%)=9.66%
Option C is correct
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