Question

Assume you have just been hired as a business manager of Pizza Palace, a regional pizza 10 Lahore Business School 1. LAHORE restaurant chain. The company's EBIT was PKR 120 million last year and is not expected to grow. Pizza Palace is in the 25% state-plus-federal tax bracket, the risk-free rate is 6 percent, and the market risk premium is 6 percent. The firm is currently financed with all equity, and it has 10 million shares outstanding. When you took your corporate finance course, your instructor stated that most firms' owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. If the company were to recapitalize, then debt would be issued, and the funds received would be used to repurchase stock. As a first step, assume that you obtained from the firm's investment banker the following estimated costs of debt for the firm at different capital structures:

Answer 1

Firms have different ways to raise financial capital, such as obtaining investors, reinvesting profits, borrowing, or issuing stock. Each option has its pros and cons, and it is important for business owners to make strategic decisions.

Step-by-step explanation:

When firms need financial capital to fund projects or investments, they have several options to raise the funds. These options include obtaining early-stage investors, reinvesting profits, borrowing through banks or bonds, or issuing stock. Each option comes with its advantages and disadvantages, and business owners must carefully consider the implications of each choice.