Exam 13: Does Debt Policy Matter

According to the graph of WACC for Union Pacific, the following is (are) true: I. cost of equity is an increasing function of the debt-equity ratio. II. cost of debt is an increasing function of the debt-equity ratio. III. weighted average cost of capital (WACC) is a decreasing function of the debt-equity ratio.

The cost of capital for a firm, rWACC, in a tax-free environment is:

Learn and Earn Company is financed entirely by Common stock that is priced to offer a 20% expected return. If the company repurchases 50% of the stock and substitutes an equal value of debt yielding 8%, what is the expected return on the common stock after refinancing?

Investors require higher returns on levered equity than on equivalent unlevered equity.

If firm U is unlevered and firm L is levered, then which of the following is true: I. VU = EU II. VL = EL + DL III. VL = EU + DL

MM Proposition II states that:

Given the following data for U&P Company: Debt (D) = $100 million; Equity (E) = $300 Million; rD = 6%; rE = 12% and TC = 30%. Calculate the after-tax weighted average cost of capital (WACC):

The beta of an all equity firm is 1.2. If the firm changes its capital structure to 50% debt and 50% equity using 8% debt financing, what will be the beta of the levered firm? The beta of debt is 0.2. (Assume no taxes.)

Generally, which of the following is true?

Learn and Earn Company is financed entirely by common stock that is priced to offer a 20% expected rate of return. The stock price is $60 and the earnings per share are $12. If the company repurchases 50% of the stock and substitutes an equal value of debt yielding 8%, what is the expected earnings per share value after refinancing?

Expected return on assets depends on several factors including the firm's capital structure.

Wealth and Health Company is financed entirely by common stock that is priced to offer a 15% expected return. The common stock price is $40/share. The earnings per share (EPS) is expected to be $6. If the company repurchases 25% of the common stock and substitutes an equal value of debt yielding 6%, what is the expected value of earnings per share after refinancing? (Ignore taxes.)

Capital structure is irrelevant if:

In an EPS-Operating Income graphical relationship, the slope of the debt line is steeper than the equity line. The debt line has a negative value for intercept because:

Briefly discuss some of the applications of the law of conservation of value.

A policy of maximizing the value of the firm is the same as a policy of maximizing the shareholders' wealth rests on two important assumptions. They are: I. the firm can ignore dividend policy II. the debt equity ratio of the firm does not change III. an issue of new debt does not affect the market value of existing debt

If an investor buys "a" proportion of the equity of a levered firm (firm L) then his/her payoff is:

Briefly describe the traditional position on capital structure.

Briefly explain how EPS-Operating Income analysis helps determine the capital structure of a firm?

If an investor buys "a" proportion of an both debt and equity of a levered firm (firm L) Then his/her payoff is: