Question 1

MM showed that in a world without taxes,a firm's value is not affected by its capital structure.

Accepted Answer

A) True 
 B)False  True

Question 2

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

Accepted Answer

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

Question 3

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

Accepted Answer

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

Question 4

In the MM extension with growth,the appropriate discount rate for the tax shield is the unlevered cost of equity.

Accepted Answer

A) True 
 B)False

Question 5

A local 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?

Accepted Answer

A)  $92,571 
B)  $102,857 
C)  $113,143 
D)  $124,457 
E)  $136,903 
A)  $92,571 
B)  $102,857 
C)  $113,143 
D)  $124,457 
E)  $136,903

Question 6

When a firm has risky debt,its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.

Accepted Answer

A) True 
 B)False

Question 7

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 8

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.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

In the MM extension with growth,the appropriate discount rate for the tax shield is the after-tax cost of debt.

Accepted Answer

A) True 
 B)False

Question 12

In the MM extension with growth,the appropriate discount rate for the tax shield is the WACC.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

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

Question 14

The major contribution of the Miller model is that it demonstrates that

Accepted Answer

A)  personal taxes decrease the value of using corporate debt. 
B)  financial distress and agency costs reduce the value of using corporate debt. 
C)  equity costs increase with financial leverage. 
D)  debt costs increase with financial leverage. 
E)  personal taxes increase the value of using corporate debt. 
A)  personal taxes decrease the value of using corporate debt. 
B)  financial distress and agency costs reduce the value of using corporate debt. 
C)  equity costs increase with financial leverage. 
D)  debt costs increase with financial leverage. 
E)  personal taxes increase the value of using corporate debt.

Question 15

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 16

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

Question 17

The market value of Firm L's debt is $200,000 and its yield is 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?

Accepted Answer

A)  $358,421 
B)  $377,286 
C)  $397,143 
D)  $417,000 
E)  $437,850 
A)  $358,421 
B)  $377,286 
C)  $397,143 
D)  $417,000 
E)  $437,850

Question 18

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 19

When a firm has risky debt,its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the equity.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements concerning capital structure theory is NOT CORRECT?

Accepted Answer

A)  Under MM with zero taxes, financial leverage has no effect on a firm's value. 
B)  Under MM with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt. 
C)  Under MM with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing. 
D)  Under MM with corporate taxes, the effect of business risk is automatically incorporated because rsL is a function of rsU. 
E)  The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt. 
A)  Under MM with zero taxes, financial leverage has no effect on a firm's value. 
B)  Under MM with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt. 
C)  Under MM with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing. 
D)  Under MM with corporate taxes, the effect of business risk is automatically incorporated because rsL is a function of rsU. 
E)  The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt.

Exam 21: Dynamic Capital Structures

MM showed that in a world without taxes,a firm's value is not affected by its capital structure.

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

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

In the MM extension with growth,the appropriate discount rate for the tax shield is the unlevered cost of equity.

When a firm has risky debt,its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.

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

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.

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.

In the MM extension with growth,the appropriate discount rate for the tax shield is the after-tax cost of debt.

In the MM extension with growth,the appropriate discount rate for the tax shield is the WACC.

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

The major contribution of the Miller model is that it demonstrates that

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

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

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

When a firm has risky debt,its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the equity.

Which of the following statements concerning capital structure theory is NOT CORRECT?

An Overview of Financial Management and the Financial Environment

Financial Statements, cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, bond Valuation, and Interest Rates

Risk and Return

Valuation of Stocks and Corporations

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

Corporate Valuation and Financial Planning

Agency Conflicts and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, seasoned Offerings, and Investment Banks

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not For Profit Businesses

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