Exam 13: Leverage and Capital Structure

T.L.C.Enterprises just revised its capital structure from a debt-equity ratio of .37 to a debt-equity ratio of .48.The firm's shareholders who prefer the old capital structure should:

Glass Growers has a cost of capital of 11.1 percent.The company is considering converting to a debt-equity ratio of .46.The interest rate on debt is7.3 percent.What would be the company’s new cost of equity? Ignore taxes.

Southern Foods has a $13 million bond issue outstanding with a coupon rate of 7.15 percent and a yield to maturity of 7.39 percent.What is the present value of the tax shield if the tax rate is 34 percent?

Which one of the following statements concerning financial leverage is correct?

The static theory of capital structure assumes a firm:

Which one of the following terms refers to the termination of a firm as a going concern?

Gabella's is an all-equity firm that has 36,000 shares of stock outstanding at a market price of $27 a share.The firm has earnings before interest and taxes of $57,600 and has a 100 percent dividend payout ratio.Ignore taxes.Gabella's has decided to issue $125,000 of debt at a rate of 9 percent and use the proceeds to repurchase shares.Terry owns 800 shares of Gabella's stock and has decided to continue holding those shares.How will Gabella's debt issue affect Terry's annual dividend income?

Which one of the following is correct based on the static theory of capital structure?

Tree Farms currently has 48,000 shares of stock outstanding and no debt.The price per share is $22.50.The firm is considering borrowing funds at 8.5 percent interest and using the proceeds to repurchase 1,750 shares of stock.Ignore taxes.How much is the firm borrowing?

A firm has a cost of debt of 7.8 percent and a cost of equity of 15.6 percent.The debt-equity ratio is .52.There are no taxes.What is the firm's weighted average cost of capital?

Kline Construction is an all-equity firm that has projected perpetual earnings before interest and taxes of $628,000.The current cost of equity is 17.6 percent and the tax rate is 35percent.The company is in the process of issuing $4.3 million of 8.3 percent annual coupon bonds at par.What is the levered value of the firm?

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

Uptown Construction is comparing two different capital structures.Plan I would result in 16,000 shares of stock and $160,000 in debt.Plan II would result in 18,000 shares of stock and $110,000 in debt.The interest rate on the debt is 9 percent.Ignoring taxes,EPS will be identical for Plans I and II when EBIT equals which one of the following?

Room and Board has determined that $41,650 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 15,500 shares of stock.The second structure consists of 12,500 shares of stock and $65,000 of debt.What is the interest rate on the debt?

Triangle Enterprises has no debt but can borrow at 8 percent.The firm's WACC is currently 13.2 percent,and there is no corporate tax.If the firm converts to 30 percent debt,what will its cost of equity be?

Assume you are comparing two firms that are identical in every aspect,except one is levered and one is unlevered.Which one of the following statements is correct regarding these two firms?

Which one of the following is an implication of M&M Proposition II without taxes?

Debbie's Cookies has a return on assets of 12.6 percent and a cost of equity of 14.8 percent.What is the pretax cost of debt if the debt-equity ratio is .38? Ignore taxes.

Gabe's Market is comparing two different capital structures.Plan I would result in 15,000 shares of stock and $210,000 in debt.Plan II would result in 13,000 shares of stock and $252,000 in debt.The interest rate on the debt is 8 percent.Ignoring taxes,compare both of these plans to an all-equity plan assuming that EBIT will be $52,000.The all-equity plan would result in 25,000 shares of stock outstanding.Of the three plans,the firm will have the highest EPS with _____ and the lowest EPS with ____.

Peter's Tools recently defaulted on a bank loan.To avoid a bankruptcy proceeding,the bank agreed to a composition.This composition would do which one of the following?