Exam 13: Leverage and Capital Structure

Jericho Snacks is an all-equity firm with estimated earnings before interest and taxes of $624,000 annually forever.Currently, the firm has no debt but is considering borrowing $725,000 at 6.75 percent interest.The tax rate is 35 percent and the current cost of equity is 15.2 percent.What is the value of the levered firm?

Which one of the following is a key provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005?

Kline Construction is an all-equity firm that has projected perpetual earnings before interest and taxes of $628,000.The current cost of equity is 17.6 percent and the tax rate is 35percent.The company is in the process of issuing $4.3 million of 8.3 percent annual coupon bonds at par.What is the levered value of the firm?

The Outlet Mall has a cost of equity of 16.3 percent, a pretax cost of debt of 7.9 percent, and a return on assets of 13.4 percent.Ignore taxes.What is the debt-equity ratio?

Catapult Movers has determined that $98,000 is the break-even level of earnings before interest and taxes for the two capital structures it is considering.The one structure consists of all equity with 30,000 shares of stock.The second structure consists of 20,000 shares of stock and $400,000 of debt.What is the interest rate on the debt?

In the process of liquidation, some types of claims receive preference over other claims.Which one of the following determines which type of claim is paid first?

Flour Mills is an all-equity firm with a total market value of $891,860.The firm has 38,000 shares of stock outstanding.Management is considering issuing $275,000 of debt at an interest rate of 7.5 percent and using the proceeds on a stock repurchase.Ignore taxes.How many shares can the firm repurchase if it issues the debt securities? (Round the number of shares repurchased down to the nearest whole share.)

A firm has a weighted average cost of capital of 11.28 percent and a cost of equity of 14.7 percent.The debt-equity ratio is .72.There are no taxes.What is the firm's cost of debt?

Brick House Markets has a tax rate of 34 percent and taxable income of $308,211.What is the value of the interest tax shield if the interest expense is $39,700?

According to M&M Proposition I with taxes, the value of a levered firm will increase when the:

Weston Mines has a cost of equity of 14.9 percent, a pretax cost of debt of 7.3 percent, and a return on assets of 12.6 percent.Ignore taxes.What is the debt-equity ratio?

The Bethlehem Inn is an all-equity firm with 9,000 shares outstanding at a value per share of $26.80.The firm is issuing $39,932 of debt and using the proceeds to reduce the number of outstanding shares.How many shares of stock will be outstanding once the debt is issued? Ignore taxes.

Which one of the following statements matches M&M Proposition I without taxes?

Traindriver Engineering has determined that $74,000 is the break-even level of earnings before interest and taxes for the two capital structures it is considering.The one structure consists of all equity with 20,000 shares of stock.The second structure consists of 17,000 shares of stock and $110,000 of debt.What is the interest rate on the debt?

The level of financial risk to which a firm is exposed is dependent on the firm's:

Chick 'N Fish is considering two different capital structures.The first option is an all-equity firm with 22,500 shares of stock.The second option consists of 18,750 shares of stock plus $120,000 of debt at an interest rate of 7.8 percent.Ignore taxes.What is the break-even level of earnings before interest and taxes (EBIT) between these two options?

Which one of the following terms is inclusive of both direct and indirect bankruptcy costs?

Green Tea House has a tax rate of 35 percent and an interest tax shield valued at $8,046 for the year.How much did the firm pay in annual interest?

TriState Landscape and Turf is an all-equity firm with a total market value of $740,000 and 30,000 shares of stock outstanding.Management is considering issuing $150,000 of debt at an interest rate of 7.25 percent and using the proceeds on a stock repurchase.Ignore taxes.How many shares will the firm repurchase if it issues the debt securities? (Round the number of shares repurchased down to the nearest whole share.)