\[\begin{array}{l} \text { Consider an economy in which there are three groups of investors and no others. }\\ \begin{array} { | l | l | l | } \hline & \text { Marginal tax rate } & \text { Personal wealth } \\ \hline \text { Group } & \text { on bonds } & \text { (£ millions) } \\ \hline \text { Plumbers } & 60 \% & 2,500 \\ \hline \text { Doctors } & 50 \% & 700 \\ \hline \text { Lawyers } & 40 \% & 100 \\ \hline \end{array} \end{array}\] There are no personal taxes on income from stocks.An investment is available that pays a tax-free 4%.The tax rate is 50%.Total corporate income before earnings and taxes (EBIT) is £224 million forever.What is the maximum debt-to-equity ratio for the economy as a whole?

The interest rate on debt = .04/(1-.5) =

Exam 16: Capital Structure: Limits to the Use of Debt

The Aggie Company has EBIT of £50,000 and market value debt of £100,000 outstanding with a 9% coupon rate.The cost of equity for an all equity ﬁrm would be 14%.Aggie has a 35% corporate tax Rate.Investors face a 20% tax rate on debt receipts and a 15% rate on equity.Determine the value of Aggie.

(Multiple Choice)

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Question 41

Given the following information, leverage will add how much value to the unlevered ﬁrm per pound of debt? Corporate tax rate: 30% Personal tax rate on income from bonds: 20% Personal tax rate on income from shares: 0%

(Multiple Choice)

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Question 42

In a Miller equilibrium, what type of investments do high tax bracket investors tend to hold?

(Multiple Choice)

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Question 43

The value of a ﬁrm in ﬁnancial distress is diminished if the ﬁrm:

(Multiple Choice)

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Question 44

Describe some of the sources of business risk and ﬁnancial risk.Do ﬁnancial decision makers have the ability to "trade off" one type of risk for the other?

(Essay)

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Question 45

You are the CEO of Cautious Care, a publicly listed home care company.As a result of a change in government regulations, you will soon be allowed to extend the services your company offers.You expect to increase your market share as well as your proﬁt margins.You schedule a talk with your CFO and discuss how you will ﬁnance the investments required for the company to use this great opportunity.What advice should your CFO give you?

(Essay)

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Question 46

Which of the following industries would tend to have the highest leverage?

(Multiple Choice)

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Question 47

Which of the following is not empirically true when formulating capital structure policy?

(Multiple Choice)

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Question 48

The TrunkLine Company debtholders are promised payments of £35 if the ﬁrm does well, but will receive only £20 if the ﬁrm does poorly.Bondholders are willing to pay £25.The promised return to The bondholders is approximately:

(Multiple Choice)

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Question 49

The Aggie Company has EBIT of £70,000 and market value debt of £100,000 outstanding with a 9% coupon rate.The cost of equity for an all equity ﬁrm would be 14%.Aggie has a 35% corporate tax Rate.Investors face a 20% tax rate on debt receipts and a 15% rate on equity.Determine the value of Aggie.

(Multiple Choice)

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Question 50

The pecking order theory and the trade-off theory of optimal capital structure lead to different predictions:

(Multiple Choice)

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Question 51

When ﬁrms issue more debt, the tax shield on debt ___, the agency costs on debt (i.e., costs of ﬁnancial distress) _, and the agency costs on equity ___.

(Multiple Choice)

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Question 52

Wigdor Manufacturing is currently all equity ﬁnanced, had EBIT of £2 million, and is in the 34% tax bracket.Louis, the company's founder, is the lone shareholder.Assume that all earnings are paid out as dividends.Now consider the fact that Louis must pay personal tax on the ﬁrm's cash ﬂow.Louis pays taxes on interest at a rate of 33%, but pays taxes on dividends at a rate of 28%. If the ﬁrm were to convert £4 million of equity into debt at a cost of 10%, calculate the total cash ﬂow to Louis after he pays personal taxes.Compare this to Louis' total cash ﬂow after personal taxes if the ﬁrm remains unlevered.

(Essay)

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Question 53

One of the indirect costs of bankruptcy is the incentive for managers to take large risks.When following this strategy:

(Multiple Choice)

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Question 54

The optimal capital structure has been achieved when the:

(Multiple Choice)

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Question 55

Consider an economy in which there are three groups of investors and no others. Marginal tax rate Personal wealth Group on bonds (£ millions) Plumbers 60\% 2,500 Doctors 50\% 700 Lawyers 40\% 100 There are no personal taxes on income from stocks.An investment is available that pays a tax-free 4%.The tax rate is 50%.Total corporate income before earnings and taxes (EBIT) is £224 million forever.What is the maximum debt-to-equity ratio for the economy as a whole?

(Essay)

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Question 56

The explicit costs, such as the legal expenses, associated with corporate default are classiﬁed as _____ costs.

(Multiple Choice)

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Question 57

Given realistic estimates of the probability and cost of bankruptcy, the future costs of a possible bankruptcy are borne by:

(Multiple Choice)

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Question 58

Given the following information, leverage will add how much value to the unlevered ﬁrm per pound of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 20% Personal tax rate on income from shares: 50%

(Multiple Choice)

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Question 59

The Do-All-Right Marketing Research ﬁrm has promised payments to its bondholders that total £100.The company believes that there is a 85% chance that the cash ﬂow will be suﬃcient to meet theseclaims.However, there is a 15% chance that cash ﬂows will fall short, in which case total earnings areexpected to be £65.If the bonds sell in the market for £84, what is an estimate of the bankruptcycosts for Do-All-Right? Assume a cost of debt of 10%.

(Essay)

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Question 60

Showing 41 - 60 of 66

Exam 16: Capital Structure: Limits to the Use of Debt

Given the following information, leverage will add how much value to the unlevered ﬁrm per pound of debt? Corporate tax rate: 30% Personal tax rate on income from bonds: 20% Personal tax rate on income from shares: 0%

In a Miller equilibrium, what type of investments do high tax bracket investors tend to hold?

The value of a ﬁrm in ﬁnancial distress is diminished if the ﬁrm:

Describe some of the sources of business risk and ﬁnancial risk.Do ﬁnancial decision makers have the ability to "trade off" one type of risk for the other?

Which of the following industries would tend to have the highest leverage?

Which of the following is not empirically true when formulating capital structure policy?

The TrunkLine Company debtholders are promised payments of £35 if the ﬁrm does well, but will receive only £20 if the ﬁrm does poorly.Bondholders are willing to pay £25.The promised return to The bondholders is approximately:

The pecking order theory and the trade-off theory of optimal capital structure lead to different predictions:

When ﬁrms issue more debt, the tax shield on debt _____, the agency costs on debt (i.e., costs of ﬁnancial distress) _____, and the agency costs on equity _____.

One of the indirect costs of bankruptcy is the incentive for managers to take large risks.When following this strategy:

The optimal capital structure has been achieved when the:

The explicit costs, such as the legal expenses, associated with corporate default are classiﬁed as _____ costs.

Given realistic estimates of the probability and cost of bankruptcy, the future costs of a possible bankruptcy are borne by:

Given the following information, leverage will add how much value to the unlevered ﬁrm per pound of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 20% Personal tax rate on income from shares: 50%

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis

Discounted Cash Flow Valuation

Bond, Equity and Firm Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

Factor Models and the Arbitrage Pricing Theory

Risk, Cost of Capital and Capital Budgeting

Efficient Capital Markets and Behavioural Finance

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Equity Financing

Debt Financing

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Short-Term Capital Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

When ﬁrms issue more debt, the tax shield on debt ___, the agency costs on debt (i.e., costs of ﬁnancial distress) _, and the agency costs on equity ___.