The T. Boom Pickens Corporation has a $1 million capital structure and always maintains this book… 1 answer below »


The T. Boom Pickens Corporation has a $1 favorite principal composition and frequently maintains this bulk appraise aggregate. Pickens prevalently earns $250,000 per year antecedently taxes of 50 percent, has an all-equity principal composition of 100,000 portion-outs, and pays out all hues in dividends. The corporation is because issuing something-due in manage to depart vile fund. The consume of the something-due and the resulting figure per portion-out of the vile fund at diverse levels of something-due are given in the aftercited consultation. It is productive that the new principal composition would be reached all at once by purchasing vile fund at the prevalent figure of $10 per portion-out. In other opinion, the consultation underneath is a register of opinion stipulations at a one purpose in era.

AMOUNT OF DEBT

AVERAGE PRE-TAX

COST OF DEBT

RESULTING PRICE PER SHARE

OF COMMON STOCK

$ 0

$10.00

100,000

10.0%

10.00

200,000

10.0

10.50

300,000

10.5

10.75

400,000

11.0

11.00

500,000

12.0

10.50

600,000

14.0

9.50

a. By study, what do you believe is the optimal principal composition (the principal composition that minimizes the firm’s overall consume of principal)? Why?

b. Construct a graph that relates after-tax principal consumes (ke, ki, and ko) to financial leverage ratios (B/S) based on the basis given overhead.

c. Are your feelings in Part (a) grown?