MBG is best described as currently:

Barbara Andrade is an equity analyst who covers the entertainment industry for
Greengable Capital Partners, a major global asset manager. Greengable owns a significant
position with a large unrealized capital gain in Mosely Broadcast Group (MBG). On a recent
conference call, MBG’s management states that they plan to increase the proportion of debt
in the company’s capital structure. Andrade is concerned that any changes in MBG’s capital
structure will negatively affect the value of Greengable’s investment.
To evaluate the potential impact of such a capital structure change on Greengable’s
investment, she gathers the information about MBG given in Exhibit A.
EXHIBIT A Current Selected Financial Information for MBG
Yield to maturity on debt 8.00%
Market value of debt $100 million
Number of shares of common stock 10 million
Market price per share of common stock $30
Cost of capital if all equity-financed 10.3%
Marginal tax rate 35%
Andrade expects that an increase in MBG’s financial leverage will increase its costs of
debt and equity. Based on an examination of similar companies in MBG’s industry, Andrade
estimates MBG’s cost of debt and cost of equity at various debt-to-total capital ratios, as
shown in Exhibit B.
Chapter 5 Capital Structure 47
part-i-05 13 January 2012; 10:19:50
EXHIBIT B Estimates of MBG’s Before-Tax Costs of Debt
and Equity
Debt-to-Total Capital Ratio Cost of Debt Cost of Equity
20% 7.7% 12.5%
30% 8.4% 13.0%
40% 9.3% 14.0%
50% 10.4% 16.0%
A. 25% debt financed and 75% equity financed.
B. 33% debt financed and 66% equity financed.
C. 75% debt financed and 25% equity financed.

Ans: A. 25% debt financed and 75% equity financed.