Question 1

Which one of the following is a key provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005?

Accepted Answer

A) Disallowance of bankruptcy prepacks 
B) Right granted to creditors to file their own reorganization plan once a firm is in bankruptcy for 18 months 
C) Disallowance of all management bonus payments while a firm is in bankruptcy 
D) Requirement that only creditors can file reorganization plans for a bankrupt firm 
E) Requirement for all Chapter 11 bankruptcies to be converted to Chapter 7 bankruptcies after 18 months 
A) Disallowance of bankruptcy prepacks 
B) Right granted to creditors to file their own reorganization plan once a firm is in bankruptcy for 18 months 
C) Disallowance of all management bonus payments while a firm is in bankruptcy 
D) Requirement that only creditors can file reorganization plans for a bankrupt firm 
E) Requirement for all Chapter 11 bankruptcies to be converted to Chapter 7 bankruptcies after 18 months

Question 2

Which one of the following statements is the core principle of M&M Proposition I,without taxes?

Accepted Answer

A) A firm's cost of equity is directly related to the firm's debt-equity ratio. 
B) A firm's WACC is directly related to the firm's debt-equity ratio. 
C) The interest tax shield increases the value of a firm. 
D) The capital structure of a firm is totally irrelevant. 
E) Levered firms have greater value than unlevered firms. 
A) A firm's cost of equity is directly related to the firm's debt-equity ratio. 
B) A firm's WACC is directly related to the firm's debt-equity ratio. 
C) The interest tax shield increases the value of a firm. 
D) The capital structure of a firm is totally irrelevant. 
E) Levered firms have greater value than unlevered firms.

Question 3

Which one of the following statements is correct?

Accepted Answer

A) All Chapter 7 bankruptcy filings must include a "workout" agreement. 
B) Firms must remain in bankruptcy for at least 18 months. 
C) Key employee retention plans (KERPs) are no longer legal. 
D) Labor contracts cannot be modified through the bankruptcy process. 
E) A firm can file for Chapter 11 bankruptcy even if the firm is solvent. 
A) All Chapter 7 bankruptcy filings must include a "workout" agreement. 
B) Firms must remain in bankruptcy for at least 18 months. 
C) Key employee retention plans (KERPs) are no longer legal. 
D) Labor contracts cannot be modified through the bankruptcy process. 
E) A firm can file for Chapter 11 bankruptcy even if the firm is solvent.

Question 4

Granny's Home Remedy has a $30 million bond issue outstanding with a coupon rate of 7.75 percent and a current yield of 7.67 percent.What is the present value of the tax shield if the tax rate is 34 percent?

Accepted Answer

A) $632,400 
B) $625,872 
C) $1.20 million 
D) $8.16 million 
E) $10.2 million 
A) $632,400 
B) $625,872 
C) $1.20 million 
D) $8.16 million 
E) $10.2 million

Question 5

Room and Board has determined that $36,000 is the break-even level of earnings before interest and taxes for the two capital structures it is considering.The one structure consists of all equity with 14,000 shares of stock.The second structure consists of 10,000 shares of stock and $80,000 of debt.What is the interest rate on the debt?

Accepted Answer

A) 7.72 percent 
B) 8.19 percent 
C) 9.97 percent 
D) 11.43 percent 
E) 12.86 percent 
A) 7.72 percent 
B) 8.19 percent 
C) 9.97 percent 
D) 11.43 percent 
E) 12.86 percent

Question 6

The Christmas Tree Farms,Inc.currently has 45,000 shares of stock outstanding and no debt.The price per share is $17.50.The firm is considering borrowing funds at 7.5 percent interest and using the proceeds to repurchase 4,000 shares of stock.Ignore taxes.How much is the firm borrowing?

Accepted Answer

A) $52,500 
B) $70,000 
C) $110,500 
D) $125,000 
E) $140,000 
A) $52,500 
B) $70,000 
C) $110,500 
D) $125,000 
E) $140,000

Question 7

Ready To Go is an all-equity firm specializing in hot ready-to-eat meals.Management has estimated the firm's earnings before interest and taxes will be $175,000 annually forever.The present cost of equity is 15.1 percent.Currently,the firm has no debt but is considering borrowing $750,000 at 9 percent interest.The tax rate is 34 percent.What is the value of the unlevered firm?

Accepted Answer

A) $623,017 
B) $646,511 
C) $704,141 
D) $764,901 
E) $855,200 
A) $623,017 
B) $646,511 
C) $704,141 
D) $764,901 
E) $855,200

Question 8

A prepack:

Accepted Answer

A) guarantees full payment to all creditors but lengthens the time span of the debt. 
B) is the joint filing of both a bankruptcy filing and a creditor-approved reorganization plan. 
C) protects the interests of both the current creditors and the existing shareholders. 
D) applies only if a firm files under Chapter 7 of the bankruptcy code. 
E) extends the time that a firm is protected by the bankruptcy process. 
A) guarantees full payment to all creditors but lengthens the time span of the debt. 
B) is the joint filing of both a bankruptcy filing and a creditor-approved reorganization plan. 
C) protects the interests of both the current creditors and the existing shareholders. 
D) applies only if a firm files under Chapter 7 of the bankruptcy code. 
E) extends the time that a firm is protected by the bankruptcy process.

Question 9

Assume both corporate taxes and financial distress costs apply to a firm.Given this,the static theory of capital structure illustrates that:

Accepted Answer

A) a firm's value and its weighted average cost of capital are inversely related. 
B) a firm's value and its tax rate are inversely related. 
C) the maximum value of a firm is obtained when a firm is financed solely with debt. 
D) the value of a firm rises as the interest rate on debt rises. 
E) the value of a firm rises as both the interest rate on debt and the tax rate rise. 
A) a firm's value and its weighted average cost of capital are inversely related. 
B) a firm's value and its tax rate are inversely related. 
C) the maximum value of a firm is obtained when a firm is financed solely with debt. 
D) the value of a firm rises as the interest rate on debt rises. 
E) the value of a firm rises as both the interest rate on debt and the tax rate rise.

Question 10

Delta Mowers has a debt-equity ratio of 1.2.Its WACC is 10.1 percent,and its cost of debt is 7.5 percent.There is no corporate tax.What is the firm's cost of equity capital?

Accepted Answer

A) 12.60 percent 
B) 13.22 percent 
C) 13.83 percent 
D) 14.29 percent 
E) 14.80 percent 
A) 12.60 percent 
B) 13.22 percent 
C) 13.83 percent 
D) 14.29 percent 
E) 14.80 percent

Question 11

The Outlet Mall has a cost of equity of 16.8 percent,a pretax cost of debt of 8.1 percent,and a return on assets of 14.5 percent.Ignore taxes.What is the debt-equity ratio?

Accepted Answer

A) 0.18 
B) 0.39 
C) 0.44 
D) 0.52 
E) 0.57 
A) 0.18 
B) 0.39 
C) 0.44 
D) 0.52 
E) 0.57

Question 12

Which one of the following is a direct bankruptcy cost?

Accepted Answer

A) Loss of customer goodwill resulting from a bankruptcy filing 
B) Legal and accounting fees related to a bankruptcy proceeding 
C) Management time spent on a bankruptcy proceeding 
D) Any financial distress cost 
E) Costs a firm spends trying to avoid bankruptcy 
A) Loss of customer goodwill resulting from a bankruptcy filing 
B) Legal and accounting fees related to a bankruptcy proceeding 
C) Management time spent on a bankruptcy proceeding 
D) Any financial distress cost 
E) Costs a firm spends trying to avoid bankruptcy

Question 13

Which one of the following is minimized when the value of a firm is maximized?

Accepted Answer

A) Return on equity 
B) WACC 
C) Debt 
D) Taxes 
E) Bankruptcy costs 
A) Return on equity 
B) WACC 
C) Debt 
D) Taxes 
E) Bankruptcy costs

Question 14

Which one of the following will generally receive the highest priority in a bankruptcy liquidation,assuming the absolute priority rule is followed?

Accepted Answer

A) Claims by unsecured creditors 
B) Employee wages 
C) Government tax claims 
D) Contributions to employee retirement plans 
E) Bankruptcy administrative expenses 
A) Claims by unsecured creditors 
B) Employee wages 
C) Government tax claims 
D) Contributions to employee retirement plans 
E) Bankruptcy administrative expenses

Question 15

Weston Mines has a cost of equity of 20.8 percent,a pretax cost of debt of 9.4 percent,and a return on assets of 17.1 percent.Ignore taxes.What is the debt-equity ratio?

Accepted Answer

A) 0.39 
B) 0.41 
C) 0.48 
D) 0.56 
E) 0.62 
A) 0.39 
B) 0.41 
C) 0.48 
D) 0.56 
E) 0.62

Question 16

Great Lakes Shipping is an all-equity firm with anticipated earnings before interest and taxes of $439,000 annually forever.The present cost of equity is 16.4 percent.Currently,the firm has no debt but is considering borrowing $1.25 million at 8.5 percent interest.The tax rate is 36 percent.What is the value of the levered firm?

Accepted Answer

A) $2,163,171 
B) $2,406,519 
C) $2,588,547 
D) $2,666,667 
E) $2,818,181 
A) $2,163,171 
B) $2,406,519 
C) $2,588,547 
D) $2,666,667 
E) $2,818,181

Question 17

Which one of the following represents the present value of the interest tax shield?

Accepted Answer

A) D × (1 - Tc) 
B) D/(1 - Tc) 
C) D/Tc 
D) D - D(Tc) 
E) Tc × D 
A) D × (1 - Tc) 
B) D/(1 - Tc) 
C) D/Tc 
D) D - D(Tc) 
E) Tc × D

Question 18

Which one of the following states that a firm's cost of equity capital is a positive linear function of the firm's capital structure?

Accepted Answer

A) Static theory of capital structure 
B) M&M Proposition I 
C) M&M Proposition II 
D) Homemade leverage theory 
E) WACC 
A) Static theory of capital structure 
B) M&M Proposition I 
C) M&M Proposition II 
D) Homemade leverage theory 
E) WACC

Question 19

You are comparing two possible capital structures for a firm.The first option is an all-equity firm.The second option involves the use of $3.8 million of debt.The break-even point between these two financing options occurs when the earnings before interest and taxes (EBIT)are $428,000.Given this,you know that leverage is beneficial to the firm:

Accepted Answer

A) whenever EBIT is less than $428,000. 
B) only when EBIT is $428,000. 
C) whenever EBIT exceeds $428,000. 
D) only if the debt is decreased by $428,000. 
E) only if the debt is increased by $428,000. 
A) whenever EBIT is less than $428,000. 
B) only when EBIT is $428,000. 
C) whenever EBIT exceeds $428,000. 
D) only if the debt is decreased by $428,000. 
E) only if the debt is increased by $428,000.

Question 20

Which one of the following is the equity risk arising from the daily operations of a firm?

Accepted Answer

A) Strategic risk 
B) Financial risk 
C) Liquidity risk 
D) Industry risk 
E) Business risk 
A) Strategic risk 
B) Financial risk 
C) Liquidity risk 
D) Industry risk 
E) Business risk

Which one of the following is a key provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005?

Which one of the following statements is the core principle of M&M Proposition I,without taxes?

Which one of the following statements is correct?

Granny's Home Remedy has a $30 million bond issue outstanding with a coupon rate of 7.75 percent and a current yield of 7.67 percent.What is the present value of the tax shield if the tax rate is 34 percent?

The Christmas Tree Farms,Inc.currently has 45,000 shares of stock outstanding and no debt.The price per share is $17.50.The firm is considering borrowing funds at 7.5 percent interest and using the proceeds to repurchase 4,000 shares of stock.Ignore taxes.How much is the firm borrowing?

A prepack:

Assume both corporate taxes and financial distress costs apply to a firm.Given this,the static theory of capital structure illustrates that:

Delta Mowers has a debt-equity ratio of 1.2.Its WACC is 10.1 percent,and its cost of debt is 7.5 percent.There is no corporate tax.What is the firm's cost of equity capital?

The Outlet Mall has a cost of equity of 16.8 percent,a pretax cost of debt of 8.1 percent,and a return on assets of 14.5 percent.Ignore taxes.What is the debt-equity ratio?

Which one of the following is a direct bankruptcy cost?

Which one of the following is minimized when the value of a firm is maximized?

Which one of the following will generally receive the highest priority in a bankruptcy liquidation,assuming the absolute priority rule is followed?

Weston Mines has a cost of equity of 20.8 percent,a pretax cost of debt of 9.4 percent,and a return on assets of 17.1 percent.Ignore taxes.What is the debt-equity ratio?

Which one of the following represents the present value of the interest tax shield?

Which one of the following states that a firm's cost of equity capital is a positive linear function of the firm's capital structure?

Which one of the following is the equity risk arising from the daily operations of a firm?

Introduction to Financial Management

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Equity Markets and Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Some Lessons From Capital Market History

Risk and Return

Cost of Capital

Dividends and Dividend Policy

Raising Capital

Short-Term Financial Planning

Working Capital Management

International Aspects of Financial Management

Filters

Exam 13: Leverage and Capital Structure

Which one of the following is a key provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005?

Which one of the following statements is the core principle of M&M Proposition I,without taxes?

Which one of the following statements is correct?

Granny's Home Remedy has a $30 million bond issue outstanding with a coupon rate of 7.75 percent and a current yield of 7.67 percent.What is the present value of the tax shield if the tax rate is 34 percent?

The Christmas Tree Farms,Inc.currently has 45,000 shares of stock outstanding and no debt.The price per share is $17.50.The firm is considering borrowing funds at 7.5 percent interest and using the proceeds to repurchase 4,000 shares of stock.Ignore taxes.How much is the firm borrowing?

A prepack:

Assume both corporate taxes and financial distress costs apply to a firm.Given this,the static theory of capital structure illustrates that:

Delta Mowers has a debt-equity ratio of 1.2.Its WACC is 10.1 percent,and its cost of debt is 7.5 percent.There is no corporate tax.What is the firm's cost of equity capital?

The Outlet Mall has a cost of equity of 16.8 percent,a pretax cost of debt of 8.1 percent,and a return on assets of 14.5 percent.Ignore taxes.What is the debt-equity ratio?

Which one of the following is a direct bankruptcy cost?

Which one of the following is minimized when the value of a firm is maximized?

Which one of the following will generally receive the highest priority in a bankruptcy liquidation,assuming the absolute priority rule is followed?

Weston Mines has a cost of equity of 20.8 percent,a pretax cost of debt of 9.4 percent,and a return on assets of 17.1 percent.Ignore taxes.What is the debt-equity ratio?

Which one of the following represents the present value of the interest tax shield?

Which one of the following states that a firm's cost of equity capital is a positive linear function of the firm's capital structure?

Which one of the following is the equity risk arising from the daily operations of a firm?

Introduction to Financial Management

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Equity Markets and Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Some Lessons From Capital Market History

Risk and Return

Cost of Capital

Dividends and Dividend Policy

Raising Capital

Short-Term Financial Planning

Working Capital Management

International Aspects of Financial Management

Filters