Question 1

Which of the following is one of the characteristics of perfect capital markets?

Accepted Answer

A)  All investors hold the efficient portfolio of assets. 
B)  There are no taxes, but there may be transaction costs associated with security trading. 
C)  A firm's financing decisions may change the cash flows generated by its investments. 
D)  Investors and firms can trade the same set of securities at competitive market prices equal to the present value (PV) of their future cash flows. 
E)  No market participants engage in illegal behaviour. 
A)  All investors hold the efficient portfolio of assets. 
B)  There are no taxes, but there may be transaction costs associated with security trading. 
C)  A firm's financing decisions may change the cash flows generated by its investments. 
D)  Investors and firms can trade the same set of securities at competitive market prices equal to the present value (PV) of their future cash flows. 
E)  No market participants engage in illegal behaviour.

Question 2

A firm that does not have trouble meeting its debt obligations is said to be in financial distress.

Accepted Answer

A) True 
 B)False

Question 3

The use of leverage as a way to signal ________ information to investors is known as the signalling theory of debt.

Accepted Answer

A)  good 
B)  bad 
C)  random 
D)  new 
E)  old 
A)  good 
B)  bad 
C)  random 
D)  new 
E)  old

Question 4

The pecking order hypothesis states that managers will have a preference to fund investment by using ________,followed by ________,and will issue ________ as a last resort.

Accepted Answer

A)  debt, equity, retained earnings 
B)  retained earnings, equity, debt 
C)  retained earnings, debt, equity 
D)  debt, retained earnings, equity 
E)  equity, retained earnings, debt 
A)  debt, equity, retained earnings 
B)  retained earnings, equity, debt 
C)  retained earnings, debt, equity 
D)  debt, retained earnings, equity 
E)  equity, retained earnings, debt

Question 5

Equity in a firm with no debt is called unlevered equity.

Accepted Answer

A) True 
 B)False

Question 6

With perfect capital markets,the total value of a firm should not depend on its capital structure.

Accepted Answer

A) True 
 B)False

Question 7

What considerations should managers have while deciding on their capital structure?

Accepted Answer

Managers should first take a look at the

Question 8

The Vᵁ in the equation above represents

Accepted Answer

A)  the value of the firm's equity. 
B)  the market value of the firm's assets. 
C)  the value of the firm's unlevered equity. 
D)  the value of the firm's debt. 
E)  the total value of a levered firm. 
A)  the value of the firm's equity. 
B)  the market value of the firm's assets. 
C)  the value of the firm's unlevered equity. 
D)  the value of the firm's debt. 
E)  the total value of a levered firm.

Question 9

A firm requires an investment of $30,000 and borrows $10,000 at 6%.If the return on equity is 15%,what is the firm's pre tax WACC?

Accepted Answer

A)  14% 
B)  13% 
C)  12% 
D)  11% 
E)  10.5% 
A)  14% 
B)  13% 
C)  12% 
D)  11% 
E)  10.5%

Question 10

The presence of leverage can influence the behaviour of the managers of a firm.

Accepted Answer

A) True 
 B)False

Question 11

What effect does debt have on a firm's weighted average cost of capital?

Accepted Answer

In a world with taxes,debt pro

Question 12

A firm requires an investment of $30,000 and borrows $15,000 at 6%.If the cost of equity is 18%,and the firm's WACC is 10.8%,what is the firm's tax rate?

Accepted Answer

A)  40% 
B)  35% 
C)  30% 
D)  45% 
E)  50% 
A)  40% 
B)  35% 
C)  30% 
D)  45% 
E)  50%

Question 13

Suppose a project financed via an issue of debt requires six annual interest payments of $20 million each year.If the tax rate is 30% and the cost of debt is 8%,what is the value of the interest rate tax shield?

Accepted Answer

A)  $31.35 million 
B)  $27.74 million 
C)  $23.20 million 
D)  $32.64 million 
E)  $36 million 
A)  $31.35 million 
B)  $27.74 million 
C)  $23.20 million 
D)  $32.64 million 
E)  $36 million

Question 14

Use the information for the question(s) below.
Consider two firms, With and Without, that have identical assets that generate identical cash flows. Without is an all-equity firm, with 1 million shares outstanding that trade at a price of $24 per share. With has 2 million shares outstanding and $12 million of debt at an interest rate of 5%.
-Assume that MM's perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5000 of your own money to invest and you plan on buying Without stock.Using homemade leverage you borrow enough in your margin account so that the payoff of your margined purchase of Without stock will be the same as a $5000 investment in With stock.The number of shares of Without stock you purchased is closest to:

Accepted Answer

A)  1650 
B)  425 
C)  2000 
D)  825 
E)  200 
A)  1650 
B)  425 
C)  2000 
D)  825 
E)  200

Question 15

Use the information for the question(s) below.
Luther is a successful logistical services firm that currently has $5 billion in cash. Luther has decided to use this cash to repurchase shares from its investors and has already announced the stock repurchase plan. Currently Luther is an all-equity firm with 1.25 billion shares outstanding. Luther's shares are currently trading at $20 per share.
-Suppose Blank Company has only one project,as forecast above,and an unlevered cost of equity of 8%.If the company uses no leverage,what is expected return to equity holders?

Accepted Answer

A)  8.0% 
B)  11.6% 
C)  9.33% 
D)  30.0% 
E)  33.3% 
A)  8.0% 
B)  11.6% 
C)  9.33% 
D)  30.0% 
E)  33.3%

Question 16

The E in the equation above represents

Accepted Answer

A)  the value of the firm's equity. 
B)  the value of the firm's debt. 
C)  the value of the firm's unlevered equity. 
D)  the market value of the firm's assets. 
E)  the total value of the firm. 
A)  the value of the firm's equity. 
B)  the value of the firm's debt. 
C)  the value of the firm's unlevered equity. 
D)  the market value of the firm's assets. 
E)  the total value of the firm.

Question 17

Equity-debt holder conflicts are more likely to arise if the risk of financial distress is high.

Accepted Answer

A) True 
 B)False

Question 18

An unlevered firm currently has a value of $15 million.The firm has a tax rate of 40%.The firm wishes to replace $5 million of its equity with $5 million of permanent debt.By increasing its leverage,the PV of the expected costs of financial distress would rise from 0 to $1 million.What is the value of the levered firm if it goes ahead with this plan?

Accepted Answer

A)  $10 million 
B)  $14 million 
C)  $15 million 
D)  $16 million 
E)  $20 million 
A)  $10 million 
B)  $14 million 
C)  $15 million 
D)  $16 million 
E)  $20 million

Question 19

Use the information for the question(s) below.
Luther is a successful logistical services firm that currently has $5 billion in cash. Luther has decided to use this cash to repurchase shares from its investors and has already announced the stock repurchase plan. Currently Luther is an all-equity firm with 1.25 billion shares outstanding. Luther's shares are currently trading at $20 per share.
-The market value of Luther's non-cash assets is closest to:

Accepted Answer

A)  $20 billion 
B)  $19 billion 
C)  $25 billion 
D)  $24 billion 
E)  $30 billion 
A)  $20 billion 
B)  $19 billion 
C)  $25 billion 
D)  $24 billion 
E)  $30 billion

Question 20

Investment cash flows are independent of financing choices in a

Accepted Answer

A)  market with frictions. 
B)  perfect capital market. 
C)  setting with frictions in investment returns. 
D)  firm with leverage. 
E)  firm with no leverage. 
A)  market with frictions. 
B)  perfect capital market. 
C)  setting with frictions in investment returns. 
D)  firm with leverage. 
E)  firm with no leverage.

Exam 16: Capital Structure

Which of the following is one of the characteristics of perfect capital markets?

A firm that does not have trouble meeting its debt obligations is said to be in financial distress.

The use of leverage as a way to signal ________ information to investors is known as the signalling theory of debt.

The pecking order hypothesis states that managers will have a preference to fund investment by using ________,followed by ________,and will issue ________ as a last resort.

Equity in a firm with no debt is called unlevered equity.

With perfect capital markets,the total value of a firm should not depend on its capital structure.

What considerations should managers have while deciding on their capital structure?

The Vᵁ in the equation above represents

A firm requires an investment of $30,000 and borrows $10,000 at 6%.If the return on equity is 15%,what is the firm's pre tax WACC?

The presence of leverage can influence the behaviour of the managers of a firm.

What effect does debt have on a firm's weighted average cost of capital?

A firm requires an investment of $30,000 and borrows $15,000 at 6%.If the cost of equity is 18%,and the firm's WACC is 10.8%,what is the firm's tax rate?

Suppose a project financed via an issue of debt requires six annual interest payments of $20 million each year.If the tax rate is 30% and the cost of debt is 8%,what is the value of the interest rate tax shield?

The E in the equation above represents

Equity-debt holder conflicts are more likely to arise if the risk of financial distress is high.

Investment cash flows are independent of financing choices in a

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters

The pecking order hypothesis states that managers will have a preference to fund investment by using ,followed by ,and will issue as a last resort.