Question 1

An investment is available that pays a tax-free 5%. The corporate tax rate is 25%. Ignoring risk,what is the pre-tax return on taxable bonds?

Accepted Answer

A)  5% 
B)  6.25% 
C)  6.67% 
D)  7.14% 
E)  7.69%. 
A)  5% 
B)  6.25% 
C)  6.67% 
D)  7.14% 
E)  7.69%.

Question 2

In a world with taxes and financial distress,when a firm is operating with the optimal capital structure: I. the debt-equity ratio will also be optimal.
II) the weighted average cost of capital will be at its minimal point.
III) the required return on assets will be at its maximum point.
IV) the increased benefit from additional debt is equal to the increased bankruptcy costs of that debt.

Accepted Answer

A)  I and IV only 
B)  II and III only 
C)  I and II only 
D)  II, III, and IV only 
E)  I, II, and IV only 
A)  I and IV only 
B)  II and III only 
C)  I and II only 
D)  II, III, and IV only 
E)  I, II, and IV only

Question 3

An exchange may offer:

Accepted Answer

A)  allow customers a 30 day money-back guarantee on the firm's product. 
B)  allow customers a 90 day warranty on the firm's product from defects. 
C)  allow bondholders to exchange some debt for stock. 
D)  allow stockholders to exchange some of their stock for debt. 
E)  Both allow bondholders to exchange some debt for stock; and allow stockholders to exchange some of their stock for debt. 
A)  allow customers a 30 day money-back guarantee on the firm's product. 
B)  allow customers a 90 day warranty on the firm's product from defects. 
C)  allow bondholders to exchange some debt for stock. 
D)  allow stockholders to exchange some of their stock for debt. 
E)  Both allow bondholders to exchange some debt for stock; and allow stockholders to exchange some of their stock for debt.

Question 4

Growth opportunities _______ the _____ of debt financing.

Accepted Answer

A)  increase; advantage 
B)  decrease; advantage 
C)  decrease; disadvantage 
D)  Both increase; advantage and decrease; disadvantage 
E)  None of these. 
A)  increase; advantage 
B)  decrease; advantage 
C)  decrease; disadvantage 
D)  Both increase; advantage and decrease; disadvantage 
E)  None of these.

Question 5

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

Accepted Answer

A)  Drugs 
B)  Computer 
C)  Paper 
D)  Electronics 
E)  Biological products 
A)  Drugs 
B)  Computer 
C)  Paper 
D)  Electronics 
E)  Biological products

Question 6

The basic lesson of MM theory is that the value of a firm is dependent upon the:

Accepted Answer

A)  capital structure of the firm. 
B)  total cash flows of the firm. 
C)  percentage of a firm to which the bondholders have a claim. 
D)  tax claim placed on the firm by the government. 
E)  size of the stockholders claims on the firm. 
A)  capital structure of the firm. 
B)  total cash flows of the firm. 
C)  percentage of a firm to which the bondholders have a claim. 
D)  tax claim placed on the firm by the government. 
E)  size of the stockholders claims on the firm.

Question 7

An investment is available that pays a tax-free 6%. The corporate tax rate is 30%. Ignoring risk,what is the pre-tax return on taxable bonds?

Accepted Answer

A)  4.20% 
B)  6.00% 
C)  7.67% 
D)  8.57% 
E)  None of these. 
A)  4.20% 
B)  6.00% 
C)  7.67% 
D)  8.57% 
E)  None of these.

Question 8

When graphing firm value against debt levels,the debt level that maximizes the value of the firm is the level where:

Accepted Answer

A)  the increase in the present value of distress costs from an additional dollar of debt is greater than the increase in the present value of the debt tax shield. 
B)  the increase in the present value of distress costs from an additional dollar of debt is equal to the increase in the present value of the debt tax shield. 
C)  the increase in the present value of distress costs from an additional dollar of debt is less than the increase of the present value of the debt tax shield. 
D)  distress costs as well as debt tax shields are zero. 
E)  distress costs as well as debt tax shields are maximized. 
A)  the increase in the present value of distress costs from an additional dollar of debt is greater than the increase in the present value of the debt tax shield. 
B)  the increase in the present value of distress costs from an additional dollar of debt is equal to the increase in the present value of the debt tax shield. 
C)  the increase in the present value of distress costs from an additional dollar of debt is less than the increase of the present value of the debt tax shield. 
D)  distress costs as well as debt tax shields are zero. 
E)  distress costs as well as debt tax shields are maximized.

Question 9

What is the pecking order theory and what are the implications that arise from this theory?

Accepted Answer

The company will first use internal fina

Question 10

Indirect costs of bankruptcy are born principally by:

Accepted Answer

A)  bondholders. 
B)  stockholders. 
C)  managers. 
D)  the federal government. 
E)  the firm's suppliers. 
A)  bondholders. 
B)  stockholders. 
C)  managers. 
D)  the federal government. 
E)  the firm's suppliers.

Question 11

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt?
Corporate tax rate: 34%
Personal tax rate on income from bonds: 20%
Personal tax rate on income from stocks: 30%

Accepted Answer

A)  $-0.050 
B)  $0.006 
C)  $0.246 
D)  $0.340 
E)  $0.423 
A)  $-0.050 
B)  $0.006 
C)  $0.246 
D)  $0.340 
E)  $0.423

Question 12

The optimal capital structure of a firm _____ the marketed claims and _____ the nonmarketed claims against the cash flows of the firm.

Accepted Answer

A)  minimizes; minimizes 
B)  minimizes; maximizes 
C)  maximizes; minimizes 
D)  maximizes; maximizes 
E)  equates; (leave blank) 
A)  minimizes; minimizes 
B)  minimizes; maximizes 
C)  maximizes; minimizes 
D)  maximizes; maximizes 
E)  equates; (leave blank)

Question 13

Is there an easily identifiable debt-equity ratio that will maximize the value of a firm?
 Why or why not?

Accepted Answer

Students should explain that in a world

Question 14

Establishing a capital structure for a firm is not simple. Although financial theory guides the process,there is no simple formula. List and explain four main items that one should consider in determining the capital structure.

Accepted Answer

Some points to consider are:
o Taxes--ta

Question 15

If a firm issues debt but writes protective and restrictive covenants into the loan contract,then the firm's debt may be issued at a _____ interest rate compared with otherwise similar debt.

Accepted Answer

A)  significantly higher 
B)  slightly higher 
C)  equal 
D)  lower 
E)  Either significantly higher or slightly higher 
A)  significantly higher 
B)  slightly higher 
C)  equal 
D)  lower 
E)  Either significantly higher or slightly higher

Question 16

An investment is available that pays a tax-free 7%. The corporate tax rate is 40%. Ignoring risk,what is the pre-tax return on taxable bonds?

Accepted Answer

A)  4.20% 
B)  7.00% 
C)  7.47% 
D)  11.67% 
E)  None of these. 
A)  4.20% 
B)  7.00% 
C)  7.47% 
D)  11.67% 
E)  None of these.

Question 17

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

Accepted Answer

A)  Some firms use no debt. 
B)  Most corporations have low debt-asset ratios. 
C)  There are no differences in the capital-structure of different industries. 
D)  Debt levels across industries vary widely. 
E)  Debt ratios in most countries are considerably less than 100%. 
A)  Some firms use no debt. 
B)  Most corporations have low debt-asset ratios. 
C)  There are no differences in the capital-structure of different industries. 
D)  Debt levels across industries vary widely. 
E)  Debt ratios in most countries are considerably less than 100%.

Question 18

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt?
Corporate tax rate: 34%
Personal tax rate on income from bonds: 10%
Personal tax rate on income from stocks: 50%

Accepted Answer

A)  $-0.050 
B)  $-0.188 
C)  $0.367 
D)  $0.633 
E)  None of these. 
A)  $-0.050 
B)  $-0.188 
C)  $0.367 
D)  $0.633 
E)  None of these.

Question 19

In general,the capital structures used by U.S. firms:

Accepted Answer

A)  tend to overweigh debt in relation to equity. 
B)  are easily explained in terms of earnings volatility. 
C)  are easily explained by analyzing the types of assets owned by the various firms. 
D)  tend to be those which maximize the use of the firm's available tax shelters. 
E)  vary significantly across industries. 
A)  tend to overweigh debt in relation to equity. 
B)  are easily explained in terms of earnings volatility. 
C)  are easily explained by analyzing the types of assets owned by the various firms. 
D)  tend to be those which maximize the use of the firm's available tax shelters. 
E)  vary significantly across industries.

Question 20

The Lanoi Company has EBIT of $30,000 and market value debt of $150,000 outstanding with an 8% coupon rate. The cost of equity for an all equity firm would be 12%. Aggie has a 30% corporate tax rate. Investors face a 20% tax rate on debt receipts and a 12% rate on equity. Determine the value of Aggie.

Accepted Answer

A)  $130,500 
B)  $142,698 
C)  $248,537 
D)  $209,500 
E)  $332,143 
A)  $130,500 
B)  $142,698 
C)  $248,537 
D)  $209,500 
E)  $332,143

Exam 17: Capital Structure: Limits to the Use of Debt

An investment is available that pays a tax-free 5%. The corporate tax rate is 25%. Ignoring risk,what is the pre-tax return on taxable bonds?

An exchange may offer:

Growth opportunities _______ the _____ of debt financing.

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

The basic lesson of MM theory is that the value of a firm is dependent upon the:

An investment is available that pays a tax-free 6%. The corporate tax rate is 30%. Ignoring risk,what is the pre-tax return on taxable bonds?

When graphing firm value against debt levels,the debt level that maximizes the value of the firm is the level where:

What is the pecking order theory and what are the implications that arise from this theory?

Indirect costs of bankruptcy are born principally by:

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 30%

The optimal capital structure of a firm _____ the marketed claims and _____ the nonmarketed claims against the cash flows of the firm.

Is there an easily identifiable debt-equity ratio that will maximize the value of a firm? Why or why not?

Establishing a capital structure for a firm is not simple. Although financial theory guides the process,there is no simple formula. List and explain four main items that one should consider in determining the capital structure.

If a firm issues debt but writes protective and restrictive covenants into the loan contract,then the firm's debt may be issued at a _____ interest rate compared with otherwise similar debt.

An investment is available that pays a tax-free 7%. The corporate tax rate is 40%. Ignoring risk,what is the pre-tax return on taxable bonds?

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

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 10% Personal tax rate on income from stocks: 50%

In general,the capital structures used by U.S. firms:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

Filters

Growth opportunities ___ the _ of debt financing.

The optimal capital structure of a firm _ the marketed claims and _ the nonmarketed claims against the cash flows of the firm.