Question 1

Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

Accepted Answer

A) True 
 B)False

Question 2

The Miller model begins with the MM model with taxes and then adds personal taxes.

Accepted Answer

A) True 
 B)False

Question 3

Firm L has debt with a market value of $200,000 and a yield of 9%. The firm's equity has a market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is Firm L's cost of equity?

Accepted Answer

A)  11.4% 
B)  12.0% 
C)  12.6% 
D)  13.3% 
E)  14.0% 
A)  11.4% 
B)  12.0% 
C)  12.6% 
D)  13.3% 
E)  14.0%

Question 4

The MM model is the same as the Miller model, but with zero corporate taxes.

Accepted Answer

A) True 
 B)False

Question 5

What is the value (in millions) of Trumbull's debt if its equity is viewed as an option?

Accepted Answer

A)  $167.57 
B)  $186.19 
C)  $204.81 
D)  $225.29 
E)  $247.82 
A)  $167.57 
B)  $186.19 
C)  $204.81 
D)  $225.29 
E)  $247.82

Question 6

MM showed that in a world with taxes, a firm's optimal capital structure would be almost 100% debt.

Accepted Answer

A) True 
 B)False

Question 7

(The following data apply to Problems 23 through 25. The problems MUST be kept together.)
The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
-What is the firm's cost of equity?

Accepted Answer

A)  21.0% 
B)  23.3% 
C)  25.9% 
D)  28.8% 
E)  32.0% 
A)  21.0% 
B)  23.3% 
C)  25.9% 
D)  28.8% 
E)  32.0%

Question 8

The MM model with corporate taxes is the same as the Miller model, but with zero personal taxes.

Accepted Answer

A) True 
 B)False

Question 9

(The following data apply to Problems 29 through 31. The problems MUST be kept together.)
Trumbull, Inc., has total value (debt plus equity) of $500 million and $200 million face value of 1-year zero coupon debt. The volatility () of Trumbull's total value is 0.60, and the risk-free rate is 5%. Assume that N(d1) = 0.9720 and N(d2) = 0.9050.
-What is the value (in millions) of Trumbull's equity if it is viewed as an option?

Accepted Answer

A)  $228.77 
B)  $254.19 
C)  $282.43 
D)  $313.81 
E)  $345.19 
A)  $228.77 
B)  $254.19 
C)  $282.43 
D)  $313.81 
E)  $345.19

Question 10

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Accepted Answer

A)  The tax shields should be discounted at the unlevered cost of equity. 
B)  The value of a growing tax shield is greater than the value of a constant tax shield. 
C)  For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions. 
D)  For a given D/S, the WACC is less than the WACC under MM's original (with tax) assumptions. 
E)  The total value of the firm increases with the amount of debt. 
A)  The tax shields should be discounted at the unlevered cost of equity. 
B)  The value of a growing tax shield is greater than the value of a constant tax shield. 
C)  For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions. 
D)  For a given D/S, the WACC is less than the WACC under MM's original (with tax) assumptions. 
E)  The total value of the firm increases with the amount of debt.

Question 11

According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

Accepted Answer

A) True 
 B)False

Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

The Miller model begins with the MM model with taxes and then adds personal taxes.

The MM model is the same as the Miller model, but with zero corporate taxes.

What is the value (in millions) of Trumbull's debt if its equity is viewed as an option?

MM showed that in a world with taxes, a firm's optimal capital structure would be almost 100% debt.

The MM model with corporate taxes is the same as the Miller model, but with zero personal taxes.

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements Part 2 Fixed Income Securities

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risk, Return, and the Capital Asset Pricing Model

Stocks, Stock Valuation, and Stock Market Equilibrium

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Financial Planning and Forecasting Financial Statements

Corporate Valuation, Value-Based Management and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Working Capital Management

Multinational Financial Management

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Initial Public Offerings, Investment Banking, and Financial Restructuring

Mergers, Lbos, Divestitures, and Holding Companies

Bankruptcy, Reorganization, and Liquidation

Derivatives and Risk Management

Portfolio Theory, Asset Pricing Models, and Behavioral Finance

Real Options

Filters

Exam 26: Analysis of Capital Structure Theory

Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

The Miller model begins with the MM model with taxes and then adds personal taxes.

The MM model is the same as the Miller model, but with zero corporate taxes.

What is the value (in millions) of Trumbull's debt if its equity is viewed as an option?

MM showed that in a world with taxes, a firm's optimal capital structure would be almost 100% debt.

The MM model with corporate taxes is the same as the Miller model, but with zero personal taxes.

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements Part 2 Fixed Income Securities

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risk, Return, and the Capital Asset Pricing Model

Stocks, Stock Valuation, and Stock Market Equilibrium

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Financial Planning and Forecasting Financial Statements

Corporate Valuation, Value-Based Management and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Working Capital Management

Multinational Financial Management

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Initial Public Offerings, Investment Banking, and Financial Restructuring

Mergers, Lbos, Divestitures, and Holding Companies

Bankruptcy, Reorganization, and Liquidation

Derivatives and Risk Management

Portfolio Theory, Asset Pricing Models, and Behavioral Finance

Real Options

Filters