Question 1

An unlevered firm is a company that

Accepted Answer

A) pays no current dividends. 
B) has only one geographic location. 
C) has no debt. 
D) produces a single product. 
E) is undervalued based on its current capital structure. 
A) pays no current dividends. 
B) has only one geographic location. 
C) has no debt. 
D) produces a single product. 
E) is undervalued based on its current capital structure.

Question 2

The interest tax shield is a key reason why

Accepted Answer

A) the value of an unlevered firm is equal to the value of a levered firm. 
B) the net cost of debt to a firm is generally less than the cost of equity. 
C) firms tend to minimize their borrowing. 
D) the cost of debt is equal to the cost of equity for a firm with a debt-to-equity ratio of 1. 
E) firms prefer equity financing over debt financing. 
A) the value of an unlevered firm is equal to the value of a levered firm. 
B) the net cost of debt to a firm is generally less than the cost of equity. 
C) firms tend to minimize their borrowing. 
D) the cost of debt is equal to the cost of equity for a firm with a debt-to-equity ratio of 1. 
E) firms prefer equity financing over debt financing.

Question 3

An all-equity firm has expected earnings of $14,200 and a market value of $82,271.The firm is planning to issue $15,000 of debt at 6.3 percent interest and use the proceeds to repurchase shares at their current market value.Ignore taxes.What will be the cost of equity after the repurchase?

Accepted Answer

A) 17.99% 
B) 18.08% 
C) 19.70% 
D) 18.97% 
E) 19.55% 
A) 17.99% 
B) 18.08% 
C) 19.70% 
D) 18.97% 
E) 19.55%

Question 4

Ernie's has 4,200 bonds outstanding with a face value of $1,000 each,a market value of $1,060 each,and a coupon rate of 7.6 percent.What is the amount of the annual interest tax shield if the tax rate is 35 percent?

Accepted Answer

A) $118,423 
B) $99,714 
C) $100,780 
D) $111,720 
E) $102,250 
A) $118,423 
B) $99,714 
C) $100,780 
D) $111,720 
E) $102,250

Question 5

A firm has a debt-equity ratio of 1.Its cost of equity is 17.4 percent and its pretax cost of debt is 7.2 percent.Assume there are no taxes or other imperfections.What would be its cost of equity if the debt-equity ratio were zero?

Accepted Answer

A) 8.8% 
B) 10.9% 
C) 12.3% 
D) 13.1% 
E) 11.6% 
A) 8.8% 
B) 10.9% 
C) 12.3% 
D) 13.1% 
E) 11.6%

Question 6

Given a world without taxes,RWACC of an unlevered firm will equal

Accepted Answer

A) RS. 
B) RB. 
C) R0. 
D) RS - R0. 
E) RS - RB. 
A) RS. 
B) RB. 
C) R0. 
D) RS - R0. 
E) RS - RB.

Question 7

Marley's is an unlevered firm with a total market value of $220,000 and 5,000 shares of stock outstanding.The firm has expected EBIT of $10,000 if the economy is normal and $12,000 if the economy booms.The firm is considering a bond issue of $88,000 with an attached interest rate of 5.9 percent.The bond proceeds will be used to repurchase shares.Ignore taxes.What will be the earnings per share after the repurchase if the economy booms?

Accepted Answer

A) $1.55 
B) $1.61 
C) $2.27 
D) $2.48 
E) $2.36 
A) $1.55 
B) $1.61 
C) $2.27 
D) $2.48 
E) $2.36

Question 8

MM Proposition I,without taxes,illustrates that

Accepted Answer

A) the value of an unlevered firm is greater than that of a levered firm. 
B) any one capital structure is just as valuable as any other capital structure for a given firm. 
C) corporate use of homemade leverage affects the value of the firm to its shareholders. 
D) the value of a firm is directly related to the use of debt. 
E) firm valuation is dependent upon shareholders aversion to homemade leverage. 
A) the value of an unlevered firm is greater than that of a levered firm. 
B) any one capital structure is just as valuable as any other capital structure for a given firm. 
C) corporate use of homemade leverage affects the value of the firm to its shareholders. 
D) the value of a firm is directly related to the use of debt. 
E) firm valuation is dependent upon shareholders aversion to homemade leverage.

Question 9

Ignoring taxes,leverage becomes a disadvantage to a firm as soon as the firm's earnings before interest

Accepted Answer

A) become negative. 
B) exceed the breakeven point. 
C) exceed the interest expense. 
D) exceed the firm's unlevered earnings. 
E) fall below the breakeven point. 
A) become negative. 
B) exceed the breakeven point. 
C) exceed the interest expense. 
D) exceed the firm's unlevered earnings. 
E) fall below the breakeven point.

Question 10

An unlevered firm has a cost of capital of 12.46 percent and a tax rate of 35 percent.The firm is considering a new capital structure with 35 percent debt.The interest rate on the debt would be 6.68 percent.What would be the firm's levered cost of capital?

Accepted Answer

A) 14.48% 
B) 14.78% 
C) 13.90% 
D) 14.27% 
E) 13.94% 
A) 14.48% 
B) 14.78% 
C) 13.90% 
D) 14.27% 
E) 13.94%

Question 11

Alto and Tenor have 17,400 shares of stock outstanding at a market price of $27 per share.The firm also has $140,000 of 6.2 percent bonds outstanding that are selling at par.The firm does not expect to pay taxes for the foreseeable future.The cost of equity is 15.3 percent.What is the value of RWACC?

Accepted Answer

A) 13.21% 
B) 17.38% 
C) 10.83% 
D) 14.64% 
E) 11.09% 
A) 13.21% 
B) 17.38% 
C) 10.83% 
D) 14.64% 
E) 11.09%

Question 12

The Outlet has an unlevered cost of capital of 15.1 percent,a tax rate of 34 percent,and expected earnings before interest and taxes of $26,100.The company has $25,000 in bonds outstanding that have a coupon rate of 7.6 percent.The bonds are selling at par.What is the cost of equity?

Accepted Answer

A) 14.31% 
B) 15.08% 
C) 16.59% 
D) 14.64% 
E) 16.37% 
A) 14.31% 
B) 15.08% 
C) 16.59% 
D) 14.64% 
E) 16.37%

Question 13

You are writing a comparison of an all-equity structure to a levered capital structure for a firm.It is accurate to state in this comparison that

Accepted Answer

A) earnings per share will always be higher in the all-equity structure. 
B) firms will only select the levered structure when individual rates on borrowed funds are lower than corporate rates. 
C) leverage lowers shareholders' returns in bad financial times. 
D) the all-equity firm has a greater advantage the higher the firm's earnings before interest. 
E) leverage improves shareholders' returns regardless of the firm's level of earnings. 
A) earnings per share will always be higher in the all-equity structure. 
B) firms will only select the levered structure when individual rates on borrowed funds are lower than corporate rates. 
C) leverage lowers shareholders' returns in bad financial times. 
D) the all-equity firm has a greater advantage the higher the firm's earnings before interest. 
E) leverage improves shareholders' returns regardless of the firm's level of earnings.

Question 14

Hazlett's is an unlevered firm with a total market value of $280,000 and 10,000 shares of stock outstanding.The firm has expected EBIT of $16,000 if the economy is normal and $19,000 if the economy booms.The firm is considering a bond issue of $42,000 with an attached interest rate of 7.3 percent.The bond proceeds will be used to repurchase shares.The tax rate is 35 percent.What will be the earnings per share after the repurchase if the economy is normal?

Accepted Answer

A) $1.27 
B) $0.63 
C) $0.99 
D) $1.05 
E) $1.18 
A) $1.27 
B) $0.63 
C) $0.99 
D) $1.05 
E) $1.18

Question 15

MM Proposition I,with taxes,is based on the concept that the

Accepted Answer

A) optimal capital structure is the one that is totally financed with equity. 
B) capital structure of the firm does not matter because investors can use homemade leverage. 
C) firm is worse off levered than unlevered. 
D) value of the firm increases as total debt increases because of the interest tax shield. 
E) cost of equity increases as the debt-equity ratio of a firm increases. 
A) optimal capital structure is the one that is totally financed with equity. 
B) capital structure of the firm does not matter because investors can use homemade leverage. 
C) firm is worse off levered than unlevered. 
D) value of the firm increases as total debt increases because of the interest tax shield. 
E) cost of equity increases as the debt-equity ratio of a firm increases.

Question 16

Which of the following are given as reasons why individual investors may be able to borrow at the same rates as corporations?
I.Corporate loans must be negotiated and supervised.
II.Corporations often borrow using illiquid assets as collateral.
III.Individuals tend to borrow smaller amounts.
IV.Individuals can borrow on margin through a broker.

Accepted Answer

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

Question 17

The Pizza Shoppe has debt with both a face and market value of $24,000 and a coupon rate of 6.4 percent.The expected earnings before interest and taxes are $21,400,the tax rate is 35 percent,and the unlevered cost of capital is 11.4 percent.What is the firm's cost of equity?

Accepted Answer

A) 13.25% 
B) 12.89% 
C) 13.92% 
D) 12.13% 
E) 14.25% 
A) 13.25% 
B) 12.89% 
C) 13.92% 
D) 12.13% 
E) 14.25%

Question 18

Which one of these argues than the value of a firm is independent of its capital structure?

Accepted Answer

A) MM Proposition I,without taxes 
B) MM Proposition II,without taxes 
C) MM Proposition I,with taxes 
D) MM Proposition II,with taxes 
E) None of the MM Propositions 
A) MM Proposition I,without taxes 
B) MM Proposition II,without taxes 
C) MM Proposition I,with taxes 
D) MM Proposition II,with taxes 
E) None of the MM Propositions

Question 19

An all-equity firm has a cost of capital of 13.3 percent.The firm is considering switching to a debt-equity ratio of 0.35 with a pretax cost of debt of 7.5 percent.The tax rate is 35 percent.What will be the firm's levered cost of equity?

Accepted Answer

A) 15.25% 
B) 14.21% 
C) 16.07% 
D) 14.62% 
E) 15.38% 
A) 15.25% 
B) 14.21% 
C) 16.07% 
D) 14.62% 
E) 15.38%

Question 20

Which one of these proposes that the value of a levered firm exceeds the value of an unlevered firm by the present value of the tax shield?

Accepted Answer

A) MM Proposition I,with and without taxes 
B) MM Proposition I,with tax 
C) MM Proposition II,with tax 
D) MM Proposition I,without tax 
E) MM Proposition II,without tax 
A) MM Proposition I,with and without taxes 
B) MM Proposition I,with tax 
C) MM Proposition II,with tax 
D) MM Proposition I,without tax 
E) MM Proposition II,without tax

An unlevered firm is a company that

The interest tax shield is a key reason why

An all-equity firm has expected earnings of $14,200 and a market value of $82,271.The firm is planning to issue $15,000 of debt at 6.3 percent interest and use the proceeds to repurchase shares at their current market value.Ignore taxes.What will be the cost of equity after the repurchase?

Ernie's has 4,200 bonds outstanding with a face value of $1,000 each,a market value of $1,060 each,and a coupon rate of 7.6 percent.What is the amount of the annual interest tax shield if the tax rate is 35 percent?

A firm has a debt-equity ratio of 1.Its cost of equity is 17.4 percent and its pretax cost of debt is 7.2 percent.Assume there are no taxes or other imperfections.What would be its cost of equity if the debt-equity ratio were zero?

Given a world without taxes,R_WACC of an unlevered firm will equal

MM Proposition I,without taxes,illustrates that

Ignoring taxes,leverage becomes a disadvantage to a firm as soon as the firm's earnings before interest

An unlevered firm has a cost of capital of 12.46 percent and a tax rate of 35 percent.The firm is considering a new capital structure with 35 percent debt.The interest rate on the debt would be 6.68 percent.What would be the firm's levered cost of capital?

The Outlet has an unlevered cost of capital of 15.1 percent,a tax rate of 34 percent,and expected earnings before interest and taxes of $26,100.The company has $25,000 in bonds outstanding that have a coupon rate of 7.6 percent.The bonds are selling at par.What is the cost of equity?

You are writing a comparison of an all-equity structure to a levered capital structure for a firm.It is accurate to state in this comparison that

MM Proposition I,with taxes,is based on the concept that the

The Pizza Shoppe has debt with both a face and market value of $24,000 and a coupon rate of 6.4 percent.The expected earnings before interest and taxes are $21,400,the tax rate is 35 percent,and the unlevered cost of capital is 11.4 percent.What is the firm's cost of equity?

Which one of these argues than the value of a firm is independent of its capital structure?

An all-equity firm has a cost of capital of 13.3 percent.The firm is considering switching to a debt-equity ratio of 0.35 with a pretax cost of debt of 7.5 percent.The tax rate is 35 percent.What will be the firm's levered cost of equity?

Which one of these proposes that the value of a levered firm exceeds the value of an unlevered firm by the present value of the tax shield?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Return and Risk: The Capital Asset Pricing Model Capm

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Limits to the Use of Debt

Dividends and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

Mergers and Acquisitions Web Only

Filters

Exam 14: Capital Structure: Basic Concepts

An unlevered firm is a company that

The interest tax shield is a key reason why

An all-equity firm has expected earnings of $14,200 and a market value of $82,271.The firm is planning to issue $15,000 of debt at 6.3 percent interest and use the proceeds to repurchase shares at their current market value.Ignore taxes.What will be the cost of equity after the repurchase?

Ernie's has 4,200 bonds outstanding with a face value of $1,000 each,a market value of $1,060 each,and a coupon rate of 7.6 percent.What is the amount of the annual interest tax shield if the tax rate is 35 percent?

A firm has a debt-equity ratio of 1.Its cost of equity is 17.4 percent and its pretax cost of debt is 7.2 percent.Assume there are no taxes or other imperfections.What would be its cost of equity if the debt-equity ratio were zero?

Given a world without taxes,RWACC of an unlevered firm will equal

MM Proposition I,without taxes,illustrates that

Ignoring taxes,leverage becomes a disadvantage to a firm as soon as the firm's earnings before interest

An unlevered firm has a cost of capital of 12.46 percent and a tax rate of 35 percent.The firm is considering a new capital structure with 35 percent debt.The interest rate on the debt would be 6.68 percent.What would be the firm's levered cost of capital?

The Outlet has an unlevered cost of capital of 15.1 percent,a tax rate of 34 percent,and expected earnings before interest and taxes of $26,100.The company has $25,000 in bonds outstanding that have a coupon rate of 7.6 percent.The bonds are selling at par.What is the cost of equity?

You are writing a comparison of an all-equity structure to a levered capital structure for a firm.It is accurate to state in this comparison that

MM Proposition I,with taxes,is based on the concept that the

The Pizza Shoppe has debt with both a face and market value of $24,000 and a coupon rate of 6.4 percent.The expected earnings before interest and taxes are $21,400,the tax rate is 35 percent,and the unlevered cost of capital is 11.4 percent.What is the firm's cost of equity?

Which one of these argues than the value of a firm is independent of its capital structure?

An all-equity firm has a cost of capital of 13.3 percent.The firm is considering switching to a debt-equity ratio of 0.35 with a pretax cost of debt of 7.5 percent.The tax rate is 35 percent.What will be the firm's levered cost of equity?

Which one of these proposes that the value of a levered firm exceeds the value of an unlevered firm by the present value of the tax shield?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Return and Risk: The Capital Asset Pricing Model Capm

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Limits to the Use of Debt

Dividends and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

Mergers and Acquisitions Web Only

Filters

Given a world without taxes,R_WACC of an unlevered firm will equal