Question 1

The major contribution of the Miller model is that it demonstrates that

Accepted Answer

A) personal taxes decrease the value of using corporate debt. 
B) financial distress and agency costs reduce the value of using corporate debt. 
C) equity costs increase with financial leverage. 
D) debt costs increase with financial leverage. 
E) personal taxes increase the value of using corporate debt. 
A) personal taxes decrease the value of using corporate debt. 
B) financial distress and agency costs reduce the value of using corporate debt. 
C) equity costs increase with financial leverage. 
D) debt costs increase with financial leverage. 
E) personal taxes increase the value of using corporate debt.

Question 2

Exhibit 17.2
Kitto Electronics has an EBIT of $200,000, a growth rate of 6%, and its tax rate is 40%. In order to support growth, Kitto must reinvest 20% of its EBIT in net operating assets. Kitto has $300,000 in 8% debt outstanding, and a similar company with no debt has a cost of equity of 11%.
-Refer to Exhibit 17.2.According to the MM extension with growth,what is the value of Kitto's tax shield?

Accepted Answer

A) $156,385 
B) $164,616 
C) $173,280 
D) $182,400 
E) $192,000 
A) $156,385 
B) $164,616 
C) $173,280 
D) $182,400 
E) $192,000

Question 3

Other things held constant,an increase in financial leverage will increase a firm's market (or systematic)risk as measured by its beta coefficient.

Accepted Answer

A) True 
 B)False

Question 4

A local firm has debt worth $200,000,with a yield of 9%,and equity worth $300,000.It is growing at a 5% rate,and its tax rate is 40%.A similar firm with no debt has a cost of equity of 12%.Under the MM extension with growth,what is the value of your firm's tax shield,i.e.,how much value does the use of debt add?

Accepted Answer

A) $92,571 
B) $102,857 
C) $113,143 
D) $124,457 
E) $136,903 
A) $92,571 
B) $102,857 
C) $113,143 
D) $124,457 
E) $136,903

Question 5

The Miller model begins with the MM model without corporate taxes and then adds personal taxes.

Accepted Answer

A) True 
 B)False

Question 6

In the MM extension with growth,the appropriate discount rate for the tax shield is the WACC.

Accepted Answer

A) True 
 B)False

Question 7

Exhibit 17.2
Kitto Electronics has an EBIT of $200,000, a growth rate of 6%, and its tax rate is 40%. In order to support growth, Kitto must reinvest 20% of its EBIT in net operating assets. Kitto has $300,000 in 8% debt outstanding, and a similar company with no debt has a cost of equity of 11%.
-Refer to Exhibit 17.2.According to the MM extension with growth,what is Kitto's unlevered value?

Accepted Answer

A) $1,296,000 
B) $1,440,000 
C) $1,600,000 
D) $1,760,000 
E) $1,936,000 
A) $1,296,000 
B) $1,440,000 
C) $1,600,000 
D) $1,760,000 
E) $1,936,000

Question 8

When a firm has risky debt,its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Accepted Answer

A) The value of a growing tax shield is greater than the value of a constant tax shield. 
B) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions. 
C) For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions. 
D) The total value of the firm increases with the amount of debt. 
E) The tax shields should be discounted at the cost of debt. 
A) The value of a growing tax shield is greater than the value of a constant tax shield. 
B) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions. 
C) For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions. 
D) The total value of the firm increases with the amount of debt. 
E) The tax shields should be discounted at the cost of debt.

Question 10

Exhibit 17.1
Eccles Inc., a zero growth firm, has an expected EBIT of $100,000 and a corporate tax rate of 30%. Eccles uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
-Refer to Exhibit 17.1.What is the firm's cost of equity?

Accepted Answer

A) 21.0% 
B) 23.3% 
C) 25.9% 
D) 28.8% 
E) 32.0% 
A) 21.0% 
B) 23.3% 
C) 25.9% 
D) 28.8% 
E) 32.0%

Question 11

Exhibit 17.3
The total value (debt plus equity) of Wilson Dover Inc. is $500 million and the face value of its 1-year coupon debt is $200 million. The volatility (σ) of Wilson Dover's total value is 0.60, and the risk-free rate is 5%. Assume that N(dS1U1B11S1U1B0) = 0.9720 and N(dS1U1B12S1U1B0) = 0.9050.
-Refer to Exhibit 17.3.What is the yield on Wilson Dover's debt?

Accepted Answer

A) 6.04% 
B) 6.36% 
C) 6.70% 
D) 7.05% 
E) 7.42% 
A) 6.04% 
B) 6.36% 
C) 6.70% 
D) 7.05% 
E) 7.42%

The major contribution of the Miller model is that it demonstrates that

Other things held constant,an increase in financial leverage will increase a firm's market (or systematic)risk as measured by its beta coefficient.

The Miller model begins with the MM model without corporate taxes and then adds personal taxes.

In the MM extension with growth,the appropriate discount rate for the tax shield is the WACC.

When a firm has risky debt,its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Exhibit 17.1 Eccles Inc., a zero growth firm, has an expected EBIT of $100,000 and a corporate tax rate of 30%. Eccles uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. -Refer to Exhibit 17.1.What is the firm's cost of equity?

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Rules

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: a Review

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

Filters

Exam 17: Dynamic Capital Structures and Corporate Valuation

The major contribution of the Miller model is that it demonstrates that

Other things held constant,an increase in financial leverage will increase a firm's market (or systematic)risk as measured by its beta coefficient.

The Miller model begins with the MM model without corporate taxes and then adds personal taxes.

In the MM extension with growth,the appropriate discount rate for the tax shield is the WACC.

When a firm has risky debt,its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Exhibit 17.1 Eccles Inc., a zero growth firm, has an expected EBIT of $100,000 and a corporate tax rate of 30%. Eccles uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. -Refer to Exhibit 17.1.What is the firm's cost of equity?

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Rules

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: a Review

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

Filters