Bike Inc.’s capital structure contains 20 percent debt and 80 percent equity and the company pays 7 percent annual interest on its debt. Bike Inc.’s stock has a beta of 1.0. Further, assume that the risk-free rate of interest equals 4 percent, and the expected return on the market portfolio equals 12 percent. The WACC for Bike Inc. will be _______ in the absence of taxes and will be ________ in the presence of a corporate marginal tax rate of 34%.
a. 11%; 10.52% b. 13%; 12.31% c. 9%; 8.25%
Costs associated with the requirement that management divert its attention away from strategically managing a corporation in favor of spending time with financial attorneys could be best described as
a. direct bankruptcy costs. b. indirect bankruptcy costs. c. mangerial-shareholder related agency costs. d. none of the above.