Question 1 It has been suggested that in a world with only corporate taxation the...
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Question 1 It has been suggested that in a world with only corporate taxation the value of the firm = the value of all equity financed + the present value of tax shield on debt finance a. If the above equation applied, what would be the most appropriate capital structure for the company? How far do existing capital structures of companies compare with the most appropriate structure according to the equation? (5 marks) b. Discuss how and why the existence of personal taxation might alter the choice of capital structure suggested in part (a) above. (10 marks) c. If a finance manager agrees with the implications for the choice of capital structure that you have suggested in part (b) above, what problems might arise in applying them within his company? (3 marks) d. (i) Give examples of possible costs associated with a high level of gearing. (7 marks) (ii) Discuss how such costs might influence the capital structure of the following. (1) A medium sized electronic company entering the home computer market and (2) An established company owning and managing a chain of hotels (5 mark) (TOTAL MARKS 30)
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