A firm is analyzing two possible capital structures-30 and 50 percent debt ratios. The firm has total assets of $5,000,000 and common stock valued at $50 per share. The firm has a marginal tax rate of 40 percent on ordinary income. The number of common shares outstanding for each of the capital structures would be ________.
A) 30 percent debt ratio: 30,000 shares and 50 percent debt ratio: 50,000 shares
B) 30 percent debt ratio: 50,000 shares and 50 percent debt ratio: 70,000 shares
C) 30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 100,000 shares
D) 30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 50,000 shares

Question

Quizplus · Accepted Answer

The number of common shares outstanding is not affected by the debt ratio. Therefore, both capital structures would have the same number of common shares outstanding. Thus, the answer is 70,000 shares for both the 30% and 50% debt ratio options.

A Firm Is Analyzing Two Possible Capital Structures-30 and 50