Exam 21: Dynamic Capital Structures and Corporate Valuation

Refer to data for Glassmaker Corporation.Using the compressed adjusted present value model,what will Glassmaker's value of equity be if it successfully implements its planned changes in operations and capital structure? (Round your answer to the closest thousand dollars. )

Which of the following statements concerning the compressed adjusted present value (APV)model is NOT CORRECT?

In a world with no taxes,MM show that a firm's capital structure does not affect the firm's value.However,when taxes are considered,MM show a positive relationship between debt and value,i.e. ,its value rises as its debt is increased.

Refer to data for Kitto Electronics.Using the compressed adjusted present value model,what is the value of Kitto's tax shield?

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%.Using the compressed adjusted present value model,what is the value of your firm's tax shield,i.e. ,how much value does the use of debt add?

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV)approach is most CORRECT?

According to MM,in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

MM showed that in a world without taxes,a firm's value is not affected by its capital structure.

The market value of Firm L's debt is $200,000 and its yield is 9%.The firm's equity has a market value of $300,000,its earnings are growing at a rate of 5%,and its tax rate is 40%.A similar firm with no debt has a cost of equity of 12%.Using the compressed adjusted present value model,what is Firm L's cost of equity?

Which of the following statements concerning the compressed adjusted present value (APV)model is NOT CORRECT?

In the compressed adjusted present value model,the appropriate discount rate for the tax shield is the after-tax cost of debt.

Refer to data for Kitto Electronics.Using the compressed adjusted present value model,what is Kitto's value of equity?

In the compressed adjusted present value model,the appropriate discount rate for the tax shield is the unlevered cost of equity.

Using the data for Sallie's Sandwiches and the compressed adjusted present value model,what is the appropriate rate for use in discounting the free cash flows and the interest tax savings?

Which of the following statements concerning the compressed adjusted present value (APV)model is NOT CORRECT?

In the compressed adjusted present value model,the appropriate discount rate for the tax shield is the WACC.

Refer to data for Kitto Electronics.According to the compressed adjusted present value model,what is Kitto's unlevered value?

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV)approach is most CORRECT?

MM showed that in a world with taxes,a firm's optimal capital structure would be almost 100% debt.

Refer to data for Glassmaker Corporation.According to the compressed adjusted present value model,what discount rate should you use to discount Glassmaker's free cash flows and interest tax savings?