Question 1

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

Accepted Answer

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

Question 2

The tax savings of the firm derived from the deductibility of interest expense is called the:

Accepted Answer

A) interest tax shield. 
B) depreciable basis. 
C) financing umbrella. 
D) current yield. 
E) tax-loss carryforward savings. 
A) interest tax shield. 
B) depreciable basis. 
C) financing umbrella. 
D) current yield. 
E) tax-loss carryforward savings.

Question 3

When comparing levered vs.unlevered capital structures,leverage works to increase EPS for high levels of EBIT because:

Accepted Answer

A) interest payments on the debt vary with EBIT levels. 
B) interest payments on the debt stay fixed, leaving more income to be distributed over less shares. 
C) interest payments on the debt stay fixed, leaving less income to be distributed over less shares. 
D) interest payments on the debt stay fixed, leaving less income to be distributed over more shares. 
E) interest payments on the debt stay fixed, leaving more income to be distributed over more shares. 
A) interest payments on the debt vary with EBIT levels. 
B) interest payments on the debt stay fixed, leaving more income to be distributed over less shares. 
C) interest payments on the debt stay fixed, leaving less income to be distributed over less shares. 
D) interest payments on the debt stay fixed, leaving less income to be distributed over more shares. 
E) interest payments on the debt stay fixed, leaving more income to be distributed over more shares.

Question 4

The interest tax shield has no value for a firm when:
I.the tax rate is equal to zero.
II.the debt-equity ratio is exactly equal to 1.
III.the firm is unlevered.
IV.a firm elects 100% equity as its capital structure.

Accepted Answer

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

Question 5

The proposition that the value of the firm is independent of its capital structure is called:

Accepted Answer

A) the capital asset pricing model. 
B) MM Proposition I. 
C) MM Proposition II. 
D) the law of one price. 
E) the efficient market hypothesis. 
A) the capital asset pricing model. 
B) MM Proposition I. 
C) MM Proposition II. 
D) the law of one price. 
E) the efficient market hypothesis.

Question 6

A firm has a debt-to-equity ratio of 1.75.If it had no debt,its cost of equity would be 9%.Its cost of debt is 7%.What is its cost of equity if the corporate tax rate is 50%?

Accepted Answer

A) 7.73% 
B) 10.0% 
C) 10.75% 
D) 12.5% 
E) None of the above. 
A) 7.73% 
B) 10.0% 
C) 10.75% 
D) 12.5% 
E) None of the above.

Question 7

In each of the theories of capital structure the cost of equity rises as the amount of debt increases.So why don't financial managers use as little debt as possible to keep the cost of equity down?
 After all,isn't the goal of the firm to maximize share value and minimize shareholder costs?

Accepted Answer

This question requires students to diffe

Question 8

The Modigliani-Miller Proposition I without taxes states:

Accepted Answer

A) A firm cannot change the total value of its outstanding securities by changing its capital structure proportions. 
B) When new projects are added to the firm the firm value is the sum of the old value plus the new. 
C) Managers can make correct corporate decisions that will satisfy all shareholders if they select projects that maximize value. 
D) The determination of value must consider the timing and risk of the cash flows. 
E) None of the above. 
A) A firm cannot change the total value of its outstanding securities by changing its capital structure proportions. 
B) When new projects are added to the firm the firm value is the sum of the old value plus the new. 
C) Managers can make correct corporate decisions that will satisfy all shareholders if they select projects that maximize value. 
D) The determination of value must consider the timing and risk of the cash flows. 
E) None of the above.

Question 9

Bertha's Boutique has 3,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 9%.The interest is paid semi-annually.What is the amount of the annual interest tax shield if the tax rate is 34%?

Accepted Answer

A) $98,500 
B) $90,100 
C) $90,750 
D) $91,800 
E) $92,250 
A) $98,500 
B) $90,100 
C) $90,750 
D) $91,800 
E) $92,250

Question 10

A levered firm is a company that has:

Accepted Answer

A) accounts Payable as the only liability on the balance sheet. 
B) has some debt in the capital structure. 
C) has all equity in the capital structure. 
D) All of the above. 
E) None of the above. 
A) accounts Payable as the only liability on the balance sheet. 
B) has some debt in the capital structure. 
C) has all equity in the capital structure. 
D) All of the above. 
E) None of the above.

Question 11

MM Proposition I without taxes is used to illustrate:

Accepted Answer

A) the value of an unlevered firm equals that of a levered firm. 
B) that one capital structure is as good as another. 
C) leverage does not affect the value of the firm. 
D) capital structure changes have no effect on stockholder's welfare. 
E) All of the above. 
A) the value of an unlevered firm equals that of a levered firm. 
B) that one capital structure is as good as another. 
C) leverage does not affect the value of the firm. 
D) capital structure changes have no effect on stockholder's welfare. 
E) All of the above.

Question 12

The reason that MM Proposition I does not hold in the presence of corporate taxation is because:

Accepted Answer

A) bondholders require higher rates of return compared with stockholders. 
B) levered firms pay less taxes compared with identical unlevered firms. 
C) dividends are no longer relevant with taxes. 
D) earnings per share are no longer relevant with taxes. 
E) All of the above. 
A) bondholders require higher rates of return compared with stockholders. 
B) levered firms pay less taxes compared with identical unlevered firms. 
C) dividends are no longer relevant with taxes. 
D) earnings per share are no longer relevant with taxes. 
E) All of the above.

Question 13

The Montana Mount Co.has expected earnings before interest and taxes of $8,100,an unlevered cost of capital of 11%,and debt with both a book and face value of $12,000.The debt has an annual 8% coupon.The tax rate is 34%.What is the value of the firm?

Accepted Answer

A) $48,600 
B) $50,000 
C) $52,680 
D) $56,667 
E) $60,600 
A) $48,600 
B) $50,000 
C) $52,680 
D) $56,667 
E) $60,600

Question 14

The concept of homemade leverage is most associated with:

Accepted Answer

A) static theory proposition. 
B) MM Proposition I with no tax. 
C) MM Proposition II with no tax. 
D) MM Proposition I with tax. 
E) MM Proposition II with tax. 
A) static theory proposition. 
B) MM Proposition I with no tax. 
C) MM Proposition II with no tax. 
D) MM Proposition I with tax. 
E) MM Proposition II with tax.

Question 15

The change in firm value in the presence of corporate taxes only is:

Accepted Answer

A) positive as equity holders face a lower effective tax rate. 
B) negative as equity holders gain the tax shield on the debt interest. 
C) negative because of the increased risk of default and fewer shares outstanding. 
D) negative because of a reduction of equity outstanding. 
E) None of the above. 
A) positive as equity holders face a lower effective tax rate. 
B) negative as equity holders gain the tax shield on the debt interest. 
C) negative because of the increased risk of default and fewer shares outstanding. 
D) negative because of a reduction of equity outstanding. 
E) None of the above.

Question 16

Your firm has a $300,000 bond issue outstanding.These bonds have a 7% coupon,pay interest semiannually,and have a current market price equal to 103% of face value.What is the amount of the annual interest tax shield given a tax rate of 35%?

Accepted Answer

A) $6,125 
B) $6,309 
C) $7,350 
D) $17,500 
E) $18,025 
A) $6,125 
B) $6,309 
C) $7,350 
D) $17,500 
E) $18,025

Question 17

Given a level of operating income of $2,500,show the specific strategy that Steve has in mind.

Accepted Answer

Mike is entitled to .2 ($2,500 - $1,600)

Question 18

Verbally explain MM Proposition I without taxes.

Accepted Answer

Modigliani and Miller Proposition I with

Question 19

Uptown Interior Designs is an all equity firm that has 40,000 shares of stock outstanding.The company has decided to borrow $1 million to buy out the shares of a deceased stockholder who holds 2,500 shares.What is the total value of this firm if you ignore taxes?

Accepted Answer

A) $15.5 million 
B) $15.6 million 
C) $16.0 million 
D) $16.8 million 
E) $17.2 million 
A) $15.5 million 
B) $15.6 million 
C) $16.0 million 
D) $16.8 million 
E) $17.2 million

Question 20

If a firm is unlevered and has a cost of equity capital of 12%,what would its cost of equity be if its debt-equity ratio became 2? The expected cost of debt is 9%.

Accepted Answer

A) 14.0% 
B) 14.67% 
C) 16.0% 
D) 20.0% 
E) None of the above. 
A) 14.0% 
B) 14.67% 
C) 16.0% 
D) 20.0% 
E) None of the above.

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

The tax savings of the firm derived from the deductibility of interest expense is called the:

When comparing levered vs.unlevered capital structures,leverage works to increase EPS for high levels of EBIT because:

The interest tax shield has no value for a firm when: I.the tax rate is equal to zero. II.the debt-equity ratio is exactly equal to 1. III.the firm is unlevered. IV.a firm elects 100% equity as its capital structure.

The proposition that the value of the firm is independent of its capital structure is called:

A firm has a debt-to-equity ratio of 1.75.If it had no debt,its cost of equity would be 9%.Its cost of debt is 7%.What is its cost of equity if the corporate tax rate is 50%?

In each of the theories of capital structure the cost of equity rises as the amount of debt increases.So why don't financial managers use as little debt as possible to keep the cost of equity down? After all,isn't the goal of the firm to maximize share value and minimize shareholder costs?

The Modigliani-Miller Proposition I without taxes states:

Bertha's Boutique has 3,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 9%.The interest is paid semi-annually.What is the amount of the annual interest tax shield if the tax rate is 34%?

A levered firm is a company that has:

MM Proposition I without taxes is used to illustrate:

The reason that MM Proposition I does not hold in the presence of corporate taxation is because:

The Montana Mount Co.has expected earnings before interest and taxes of $8,100,an unlevered cost of capital of 11%,and debt with both a book and face value of $12,000.The debt has an annual 8% coupon.The tax rate is 34%.What is the value of the firm?

The concept of homemade leverage is most associated with:

The change in firm value in the presence of corporate taxes only is:

Your firm has a $300,000 bond issue outstanding.These bonds have a 7% coupon,pay interest semiannually,and have a current market price equal to 103% of face value.What is the amount of the annual interest tax shield given a tax rate of 35%?

Given a level of operating income of $2,500,show the specific strategy that Steve has in mind.

Verbally explain MM Proposition I without taxes.

Uptown Interior Designs is an all equity firm that has 40,000 shares of stock outstanding.The company has decided to borrow $1 million to buy out the shares of a deceased stockholder who holds 2,500 shares.What is the total value of this firm if you ignore taxes?

If a firm is unlevered and has a cost of equity capital of 12%,what would its cost of equity be if its debt-equity ratio became 2? The expected cost of debt is 9%.

Introduction to Corporate Finance

Financial Statements Cash Flow

Financial Statements Analysis and Long-Term Planning

Discounted Cash Flow Valuation

Interest Rate 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 Capital Budgeting

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Limits to the Use of Debt

Dividend and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

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Exam 14: Capital Structure: Basic Concepts

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

The tax savings of the firm derived from the deductibility of interest expense is called the:

When comparing levered vs.unlevered capital structures,leverage works to increase EPS for high levels of EBIT because:

The interest tax shield has no value for a firm when: I.the tax rate is equal to zero. II.the debt-equity ratio is exactly equal to 1. III.the firm is unlevered. IV.a firm elects 100% equity as its capital structure.

The proposition that the value of the firm is independent of its capital structure is called:

A firm has a debt-to-equity ratio of 1.75.If it had no debt,its cost of equity would be 9%.Its cost of debt is 7%.What is its cost of equity if the corporate tax rate is 50%?

In each of the theories of capital structure the cost of equity rises as the amount of debt increases.So why don't financial managers use as little debt as possible to keep the cost of equity down? After all,isn't the goal of the firm to maximize share value and minimize shareholder costs?

The Modigliani-Miller Proposition I without taxes states:

Bertha's Boutique has 3,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 9%.The interest is paid semi-annually.What is the amount of the annual interest tax shield if the tax rate is 34%?

A levered firm is a company that has:

MM Proposition I without taxes is used to illustrate:

The reason that MM Proposition I does not hold in the presence of corporate taxation is because:

The Montana Mount Co.has expected earnings before interest and taxes of $8,100,an unlevered cost of capital of 11%,and debt with both a book and face value of $12,000.The debt has an annual 8% coupon.The tax rate is 34%.What is the value of the firm?

The concept of homemade leverage is most associated with:

The change in firm value in the presence of corporate taxes only is:

Your firm has a $300,000 bond issue outstanding.These bonds have a 7% coupon,pay interest semiannually,and have a current market price equal to 103% of face value.What is the amount of the annual interest tax shield given a tax rate of 35%?

Given a level of operating income of $2,500,show the specific strategy that Steve has in mind.

Verbally explain MM Proposition I without taxes.

Uptown Interior Designs is an all equity firm that has 40,000 shares of stock outstanding.The company has decided to borrow $1 million to buy out the shares of a deceased stockholder who holds 2,500 shares.What is the total value of this firm if you ignore taxes?

If a firm is unlevered and has a cost of equity capital of 12%,what would its cost of equity be if its debt-equity ratio became 2? The expected cost of debt is 9%.

Introduction to Corporate Finance

Financial Statements Cash Flow

Financial Statements Analysis and Long-Term Planning

Discounted Cash Flow Valuation

Interest Rate 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 Capital Budgeting

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Limits to the Use of Debt

Dividend and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

Filters