Exam 13: Leverage and Capital Structure

The Piano Movers can borrow at 7.8 percent.The firm currently has no debt,and the cost of equity is 15 percent.The current value of the firm is $680,000.What will the value be if the firm borrows $140,000 and uses the proceeds to repurchase shares? The corporate tax rate is 35 percent.

The use of borrowing by an individual to adjust his or her overall exposure to financial leverage is referred to as:

Katz is an all-equity development company that has 52,000 shares of stock outstanding at a market price of $32 a share.The firm's earnings before interest and taxes are $46,000.Katz has decided to issue $176,000 of debt at a rate of 8 percent and use the proceeds to repurchase shares.What should Leslie do if she owns 500 shares of Katz stock and wants to use homemade leverage to offset the leverage being assumed by the firm?

Newborn Nursery has 12,000 bonds outstanding with a face value of $1,000 each.The coupon rate is 6.9 percent and the tax rate is 34 percent.What is the present value of the interest tax shield?

Roller Coaster's has a WACC of 11.6 percent,ignoring taxes.It has a target capital structure of 60 percent equity and 40 percent debt and a cost of equity of 14.27 percent.What is the cost of debt?

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

When is a firm insolvent from an accounting perspective?

Which statement is true?

Bird Houses is an all-equity firm with a total market value of $388,980 and18,000 shares of stock outstanding.Management is considering issuing $68,000 of debt at an interest rate of 6.5 percent and using the proceeds on a stock repurchase.Ignore taxes.How many shares will the firm repurchase if it issues the debt securities? (Round the number of shares repurchased down to the nearest whole share.)

Taunton's is an all-equity firm that has 160,000 shares of stock outstanding.Neal,the financial vice president,is considering borrowing $275,000 at 7.45 percent interest to repurchase 25,000 shares.Ignoring taxes,what is the current value of the firm?

Which one of the following conditions exists at the point where a firm maximizes its value?

Which one of the following best defines legal bankruptcy?

Jericho Snacks is an all-equity firm with estimated earnings before interest and taxes of $624,000 annually forever.Currently,the firm has no debt but is considering borrowing $725,000 at 6.75 percent interest.The tax rate is 35 percent and the current cost of equity is 15.2 percent.What is the value of the levered firm?

A firm has a weighted average cost of capital of 11.28 percent and a cost of equity of 14.7 percent.The debt-equity ratio is .72.There are no taxes.What is the firm's cost of debt?

Jasper Industrial has no debt outstanding and a total market value of $216,000.Earnings before interest and taxes,EBIT,are projected to be $15,000 if economic conditions are normal.If there is strong expansion in the economy,then EBIT will be 12 percent higher.If there is a recession,then EBIT will be 15 percent lower.There are currently 8,600 shares outstanding.Ignore taxes.What is the percentage change in EPS when a normal economy slips into recession?

An all-equity firm has a return on assets of 13.3 percent.The firm is considering converting to a debt-equity ratio of .48.The pretax cost of debt is 8.6 percent.Ignoring taxes,what will the cost of equity be if the firm switches to the levered capital structure?

Which one of the following is the theory that a firm should borrow up to the point where the additional tax benefit from an extra dollar of debt equals the additional costs associated with financial distress from that additional debt?

Flour Mills is an all-equity firm with a total market value of $891,860.The firm has 38,000 shares of stock outstanding.Management is considering issuing $275,000 of debt at an interest rate of 7.5 percent and using the proceeds on a stock repurchase.Ignore taxes.How many shares can the firm repurchase if it issues the debt securities? (Round the number of shares repurchased down to the nearest whole share.)

The Outlet Mall has a cost of equity of 16.3 percent,a pretax cost of debt of 7.9 percent,and a return on assets of 13.4 percent.Ignore taxes.What is the debt-equity ratio?

Cross Town Cookies is an all-equity firm with a total market value of $4,187,100.The firm has 127,500 shares of stock outstanding.Management is considering issuing $300,000 of debt at an interest rate of 6 percent and using the proceeds to repurchase shares.The projected earnings before interest and taxes are $215,600.What are the anticipated earnings per share if the debt is issued? Ignore taxes.(Round the number of shares repurchased down to the nearest whole share.)