Exam 16: Financial Leverage and Capital Structure Policy

D.L.Tuckers has $21,000 of debt outstanding that is selling at par and has a coupon rate of 7.5 percent.The tax rate is 32 percent.What is the present value of the tax shield?

The proposition that a firm borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs is called:

The business risk of a firm:

You currently own 600 shares of JKL,Inc.JKL is an all equity firm that has 75,000 shares of stock outstanding at a market price of $40 a share.The company's earnings before interest and taxes are $140,000.JKL has decided to issue $1 million of debt at 8 percent interest.This debt will be used to repurchase shares of stock.How many shares of JKL stock must you sell to unlever your position if you can loan out funds at 8 percent interest?

Young's Home Supply has a debt-equity ratio of 0.80.The cost of equity is 14.5 percent and the aftertax cost of debt is 4.9 percent.What will the firm's cost of equity be if the debt-equity ratio is revised to 0.70?

Which one of the following states that the value of a firm is unrelated to the firm's capital structure?

Percy's Wholesale Supply has earnings before interest and taxes of $106,000.Both the book and the market value of debt is $170,000.The unlevered cost of equity is 15.5 percent while the pre-tax cost of debt is 8.6 percent.The tax rate is 38 percent.What is the firm's weighted average cost of capital?

The optimal capital structure has been achieved when the:

The optimal capital structure:

M & M Proposition II is the proposition that:

New Schools,Inc.expects an EBIT of $7,000 every year forever.The firm currently has no debt,and its cost of equity is 15 percent.The firm can borrow at 8 percent and the corporate tax rate is 34 percent.What will the value of the firm be if it converts to 50 percent debt?

The value of a firm is maximized when the:

The Jean Outlet is an all equity firm that has 146,000 shares of stock outstanding.The company has decided to borrow the $1.1 million to repurchase 7,500 shares of its stock from the estate of a deceased shareholder.What is the total value of the firm if you ignore taxes?

Which of the following statements related to financial risk are correct? I.Financial risk is the risk associated with the use of debt financing. II.As financial risk increases so too does the cost of equity. III.Financial risk is wholly dependent upon the financial policy of a firm. IV.Financial risk is the risk that is inherent in a firm's operations.

Bright Morning Foods has expected earnings before interest and taxes of $48,600,an unlevered cost of capital of 13.2 percent,and debt with both a book and face value of $25,000.The debt has an 8.5 percent coupon.The tax rate is 34 percent.What is the value of the firm?

A business firm ceases to exist as a going concern as a result of which one of the following?

Which one of the following statements related to Chapter 7 bankruptcy is correct?

Which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? Assume there are no taxes.

The Pizza Palace has a cost of equity of 15.3 percent and an unlevered cost of capital of 11.8 percent.The company has $22,000 in debt that is selling at par value.The levered value of the firm is $41,000 and the tax rate is 34 percent.What is the pre-tax cost of debt?

M & M Proposition I with no tax supports the argument that: