Exam 26: Analysis of Capital Structure Theory
Exam 1: An Overview of Financial Management and the Financial Environment46 Questions
Exam 2: Financial Statements, Cash Flow, and Taxes74 Questions
Exam 3: Analysis of Financial Statements103 Questions
Exam 4: Time Value of Money159 Questions
Exam 5: Bonds, Bond Valuation, and Interest Rates100 Questions
Exam 6: Risk, Return, and the Capital Asset Pricing Model137 Questions
Exam 7: Stocks, Stock Valuation, and Stock Market Equilibrium66 Questions
Exam 8: Financial Options and Applications in Corporate Finance26 Questions
Exam 9: The Cost of Capital90 Questions
Exam 10: The Basics of Capital Budgeting: Evaluating Cash Flows104 Questions
Exam 11: Cash Flow Estimation and Risk Analysis70 Questions
Exam 12: Financial Planning and Forecasting Financial Statements47 Questions
Exam 13: Corporate Valuation, Value-Based Management and Corporate Governance24 Questions
Exam 15: Capital Structure Decisions70 Questions
Exam 16: Working Capital Management128 Questions
Exam 17: Multinational Financial Management47 Questions
Exam 18: Lease Financing22 Questions
Exam 19: Hybrid Financing: Preferred Stock, Warrants, and Convertibles30 Questions
Exam 20: Initial Public Offerings, Investment Banking, and Financial Restructuring25 Questions
Exam 21: Mergers, Lbos, Divestitures, and Holding Companies48 Questions
Exam 22: Bankruptcy, Reorganization, and Liquidation10 Questions
Exam 23: Derivatives and Risk Management14 Questions
Exam 24: Portfolio Theory, Asset Pricing Models, and Behavioral Finance31 Questions
Exam 25: Real Options19 Questions
Exam 26: Analysis of Capital Structure Theory31 Questions
Exam 27: Providing and Obtaining Credit35 Questions
Exam 28: Advanced Issues in Cash Management and Inventory Control24 Questions
Exam 29: Pension Plan Management10 Questions
Exam 30: Financial Management in Not-For-Profit Businesses10 Questions
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MM showed that in a world without taxes, a firm's value is not affected by its capital structure.
(True/False)
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Which of the following statements concerning the MM extension with growth is NOT CORRECT?
(Multiple Choice)
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(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 value of the firm according to MM with corporate taxes?
(Multiple Choice)
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In a world with no taxes, MM show that a firm's capital structure does not affect the firm's value. However, when taxes are considered, MM show a positive relationship between debt and value, i.e., its value rises as its debt is increased.
(True/False)
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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 5% rate, 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 would Firm L's total value be if it had no debt?
(Multiple Choice)
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(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%.
-Assume that the firm's gain from leverage according to the Miller model is $126,667. If the effective personal tax rate on stock income is TS = 20%, what is the implied personal tax rate on debt income?
(Multiple Choice)
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MM showed that in a world with taxes, a firm's optimal capital structure would be almost 100% debt.
(True/False)
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The Miller model begins with the MM model without corporate taxes and then adds personal taxes.
(True/False)
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Your firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing at a 5% rate, 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 the value of your firm's tax shield, i.e., how much value does the use of debt add?
(Multiple Choice)
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(The following data apply to Problems 26 through 28. The problems MUST be kept together.)
Gomez computer systems has an EBIT of $200,000, a growth rate of 6%, and its tax rate is 40%. In order to support growth, Gomez must reinvest 20% of its EBIT in net operating assets. Gomez has $300,000 in 8% debt outstanding, and a similar company with no debt has a cost of equity of 11%.
-According to the MM extension with growth, what is Gomez's value of equity?
(Multiple Choice)
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Which of the following statements concerning capital structure theory is NOT CORRECT?
(Multiple Choice)
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