Question 1

As the level of debt increases,the tax benefits of debt increase until

Accepted Answer

A)  interest costs exceed dividend payments. 
B)  the tax shield benefit exceeds distress costs. 
C)  raw material costs exceed dividend payments. 
D)  employee costs exceed interest expense. 
E)  the firm decides to issue more equity. 
A)  interest costs exceed dividend payments. 
B)  the tax shield benefit exceeds distress costs. 
C)  raw material costs exceed dividend payments. 
D)  employee costs exceed interest expense. 
E)  the firm decides to issue more equity.

Question 2

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.
-With perfect capital markets,what is the market value of Luther's equity after the share repurchase?

Accepted Answer

A)  $15 billion 
B)  $10 billion 
C)  $25 billion 
D)  $20 billion 
E)  $5 billion 
A)  $15 billion 
B)  $10 billion 
C)  $25 billion 
D)  $20 billion 
E)  $5 billion

Question 3

The optimal capital structure depends on ________ such as taxes,distress costs,and agency costs.

Accepted Answer

A)  capital market factors 
B)  market imperfections 
C)  firm-specific risks 
D)  systematic risks 
E)  government regulations 
A)  capital market factors 
B)  market imperfections 
C)  firm-specific risks 
D)  systematic risks 
E)  government regulations

Question 4

An unlevered firm currently has a value of $40 million.The firm has a tax rate of 40%.The firm wishes to replace $10 million of its equity with $10 million of permanent debt.What is the value of the levered firm if it goes ahead with this plan?

Accepted Answer

A)  $42 million 
B)  $50 million 
C)  $40 million 
D)  $44 million 
E)  $45 million 
A)  $42 million 
B)  $50 million 
C)  $40 million 
D)  $44 million 
E)  $45 million

Question 5

The direct costs of bankruptcy are estimated to be far greater,as a percent of assets,than the indirect costs of bankruptcy.

Accepted Answer

A) True 
 B)False

Question 6

An unlevered firm currently has a value of $100 million.The firm has a tax rate of 30%.The firm wishes to replace $50 million of its equity with $50 million of permanent debt.What is the value of the levered firm if it goes ahead with this plan?

Accepted Answer

A)  $115 million 
B)  $100 million 
C)  $50 million 
D)  $150 million 
E)  $85 million 
A)  $115 million 
B)  $100 million 
C)  $50 million 
D)  $150 million 
E)  $85 million

Question 7

What are some implications of market imperfections?

Accepted Answer

Market frictions such as corpo

Question 8

Equity in a firm with no debt is called

Accepted Answer

A)  risk-free equity. 
B)  risky equity. 
C)  shareholders' equity. 
D)  unlevered equity. 
E)  levered equity. 
A)  risk-free equity. 
B)  risky equity. 
C)  shareholders' equity. 
D)  unlevered equity. 
E)  levered equity.

Question 9

When firms generate sufficient cash to fund their investments and choose not to issue debt or equity,instead relying on retained earnings,this is an example of

Accepted Answer

A)  market timing. 
B)  adverse selection. 
C)  the pecking order hypothesis. 
D)  the agency cost of debt. 
E)  the signalling theory of debt. 
A)  market timing. 
B)  adverse selection. 
C)  the pecking order hypothesis. 
D)  the agency cost of debt. 
E)  the signalling theory of debt.

Question 10

Suppose a project financed via an issue of debt requires six annual interest payments of $20 million each year.If the cost of debt is 8%,and the present value of the interest rate tax shield is $27.74 million,what is the firm's tax rate?

Accepted Answer

A)  25% 
B)  30% 
C)  33% 
D)  35% 
E)  40% 
A)  25% 
B)  30% 
C)  33% 
D)  35% 
E)  40%

Question 11

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 borrows $10,000 at 5% to make the investment,what is the return to equity holders if demand is weak?

Accepted Answer

A)  8.0% 
B)  -37.5% 
C)  -58.6% 
D)  -35.3% 
E)  -12.5% 
A)  8.0% 
B)  -37.5% 
C)  -58.6% 
D)  -35.3% 
E)  -12.5%

Question 12

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 With stock.Using homemade (un)leverage you invest enough at the risk-free rate so that the payoff of your account will be the same as a $5000 investment in Without stock.The number of shares of With stock you purchased is closest to:

Accepted Answer

A)  100 
B)  425 
C)  1650 
D)  825 
E)  1000 
A)  100 
B)  425 
C)  1650 
D)  825 
E)  1000

Question 13

When a firm's investment decisions have different consequences for the value of equity and the value of debt,managers may take actions

Accepted Answer

A)  to increase debt values. 
B)  to decrease costs of distress. 
C)  that benefit shareholders at the expense of debt holders. 
D)  that benefit debt holders at the expense of shareholders. 
E)  to reduce fixed costs. 
A)  to increase debt values. 
B)  to decrease costs of distress. 
C)  that benefit shareholders at the expense of debt holders. 
D)  that benefit debt holders at the expense of shareholders. 
E)  to reduce fixed costs.

Question 14

We discount the cash flows of a levered firm with a different discount rate than the cost of equity of the unlevered firm because

Accepted Answer

A)  leverage decreases the risk of equity of the firm. 
B)  leverage changes the unlevered cost of equity. 
C)  leverage increases the risk of equity of the firm. 
D)  cost of debt decreases in this setting. 
E)  default risk increases. 
A)  leverage decreases the risk of equity of the firm. 
B)  leverage changes the unlevered cost of equity. 
C)  leverage increases the risk of equity of the firm. 
D)  cost of debt decreases in this setting. 
E)  default risk increases.

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 borrows $10,000 at 5% to make the investment,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

When investors use leverage in their own portfolios to adjust the leverage choice made by the firm,it is referred to as

Accepted Answer

A)  outside debt. 
B)  retained earnings. 
C)  homemade leverage. 
D)  payout ratio. 
E)  portfolio rebalancing. 
A)  outside debt. 
B)  retained earnings. 
C)  homemade leverage. 
D)  payout ratio. 
E)  portfolio rebalancing.

Question 17

A bankruptcy process is complex,time-consuming,and costly.The costs of bankruptcy include

Accepted Answer

A)  dividend payments. 
B)  raw material costs. 
C)  costs of hiring legal experts, appraisers, and auctioneers. 
D)  taxes. 
E)  interest payments. 
A)  dividend payments. 
B)  raw material costs. 
C)  costs of hiring legal experts, appraisers, and auctioneers. 
D)  taxes. 
E)  interest payments.

Question 18

A firm requires an investment of $20,000.The firm's debt cost of capital is 5%,and its return on equity is 12%.If the firm's pre-tax WACC is 7.8%,how much equity did the firm use for its investment?

Accepted Answer

A)  $8,000 
B)  $10,000 
C)  $12,000 
D)  $14,000 
E)  $20,000 
A)  $8,000 
B)  $10,000 
C)  $12,000 
D)  $14,000 
E)  $20,000

Question 19

A firm has a market value of assets of $50,000.It borrows $10,000 at 7%.If the unlevered cost of equity is 15%,what is the firm's cost of equity capital?

Accepted Answer

A)  15% 
B)  16% 
C)  17% 
D)  18% 
E)  19% 
A)  15% 
B)  16% 
C)  17% 
D)  18% 
E)  19%

Question 20

How does the interest paid by a firm affect its value to investors?

Accepted Answer

The interest paid by a firm is tax-deduc

Exam 16: Capital Structure

As the level of debt increases,the tax benefits of debt increase until

The optimal capital structure depends on ________ such as taxes,distress costs,and agency costs.

An unlevered firm currently has a value of $40 million.The firm has a tax rate of 40%.The firm wishes to replace $10 million of its equity with $10 million of permanent debt.What is the value of the levered firm if it goes ahead with this plan?

The direct costs of bankruptcy are estimated to be far greater,as a percent of assets,than the indirect costs of bankruptcy.

An unlevered firm currently has a value of $100 million.The firm has a tax rate of 30%.The firm wishes to replace $50 million of its equity with $50 million of permanent debt.What is the value of the levered firm if it goes ahead with this plan?

What are some implications of market imperfections?

Equity in a firm with no debt is called

When firms generate sufficient cash to fund their investments and choose not to issue debt or equity,instead relying on retained earnings,this is an example of

Suppose a project financed via an issue of debt requires six annual interest payments of $20 million each year.If the cost of debt is 8%,and the present value of the interest rate tax shield is $27.74 million,what is the firm's tax rate?

When a firm's investment decisions have different consequences for the value of equity and the value of debt,managers may take actions

We discount the cash flows of a levered firm with a different discount rate than the cost of equity of the unlevered firm because

When investors use leverage in their own portfolios to adjust the leverage choice made by the firm,it is referred to as

A bankruptcy process is complex,time-consuming,and costly.The costs of bankruptcy include

A firm requires an investment of $20,000.The firm's debt cost of capital is 5%,and its return on equity is 12%.If the firm's pre-tax WACC is 7.8%,how much equity did the firm use for its investment?

A firm has a market value of assets of $50,000.It borrows $10,000 at 7%.If the unlevered cost of equity is 15%,what is the firm's cost of equity capital?

How does the interest paid by a firm affect its value to investors?

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