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Company Z has a total value of $ 500,000. On its balance sheet, it has a debt of $ 150,000 paid at 3%. The shareholders ask for a dividend of 10% a year. Company Z is yearly audited and pays all its due taxes. What is the capital structure for Z? What would be the risk profile of Z? How can capital structure influence the risk profile of Z?

Company Z has a total value of $ 500,000. On its balance sheet, it has a debt of $ 150,000 paid at 3%. The shareholders ask for a dividend of 10% a year. Company Z is yearly audited and pays all its due taxes. What is the capital structure for Z? What would be the risk profile of Z? How can capital structure influence the risk profile of Z?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter13: Capital Structure Concepts
Section: Chapter Questions
Problem 1P
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Company Z has a total value of $ 500,000. On its balance sheet, it has a debt of $ 150,000 paid at 3%. The shareholders ask for a dividend of 10% a year. Company Z is yearly audited and pays all its due taxes.

  1. What is the capital structure for Z?
  2. What would be the risk profile of Z?
  3. How can capital structure influence the risk profile of Z?
Expert Solution
Step 1

The capital structure is the structure of source of finance of funds of the company.

Step 2

The computation of capital structure is as follows:

Finance homework question answer, step 2, image 1

Finance homework question answer, step 2, image 2

Step 3

Part (1)

The capital structure of firm is from equity and debt. The equity fund is 70% and the debt funds are 30%.

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