Exam 16: Capital Structure

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. -Assume that in addition to 1.25 billion common shares outstanding,Luther has stock options given to employees valued at $2 billion.The market value of Luther's non-cash assets is closest to:

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. -After the repurchase,how many shares will Luther have outstanding?

Market timing means that managers may sell ________ when they believe the stock is over-valued and rely on ________ when the stock is under-valued.

In general,issuing equity may not dilute the ownership of existing shareholders if

Even if two firms operate in the same industry,they may prefer different choices of debt-equity ratios.

A firm requires an investment of $20,000 and borrows $10,000.If the return on equity is 20%,the tax rate is 30%,and the WACC is 12.8%,what is the firm's cost of debt?

Consider a firm whose capital structure includes both debt and equity.If the firm must pay taxes in a given year,which of the following has the highest value?

What are direct costs of financial distress?

A firm is currently financed with 40% equity and 60% debt.The firm generates perpetual earnings after taxes and interest payments of $2 million per year.The firm's cost of equity is 12%,its cost of debt is 5%,and it has a tax rate of 40%.What is the value of the levered firm?

The presence of financial distress costs can explain why firms choose debt levels that are too low to exploit the interest tax shield.

A firm requires an investment of $20,000.The firm's debt cost of capital is 6%,and its return on equity is 15%.If the firm's pre-tax WACC is 10.5%,how much did the firm borrow?

Suppose a project financed via an issue of debt requires five annual interest payments of $10 million each year.If the tax rate is 30% and the cost of debt is 6%,what is the value of the interest rate tax shield?

Differences in the magnitude of financial distress costs and volatility of cash flows across industries do not impact the choice of leverage.