Question 1

An investment is available that pays a tax-free 7%.The corporate tax rate is 40%.Ignoring risk, what is the pre-tax return on taxable bonds?

Accepted Answer

A) 4.20% 
B) 7.00% 
C) 7.47% 
D) 11.67% 
E) None of the above 
A) 4.20% 
B) 7.00% 
C) 7.47% 
D) 11.67% 
E) None of the above

Question 2

Which of the following is true?

Accepted Answer

A) A firm with low anticipated profit will likely take on a high level of debt. 
B) A successful firm will probably take on zero debt. 
C) Rational firms raise debt levels when profits are expected to decline. 
D) Rational investors are likely to infer a higher firm value from a zero debt level. 
E) Investors will generally view an increase in debt as a positive sign for the firm's value. 
A) A firm with low anticipated profit will likely take on a high level of debt. 
B) A successful firm will probably take on zero debt. 
C) Rational firms raise debt levels when profits are expected to decline. 
D) Rational investors are likely to infer a higher firm value from a zero debt level. 
E) Investors will generally view an increase in debt as a positive sign for the firm's value.

Question 3

The basic lesson of MM theory is that the value of a firm is dependent upon the:

Accepted Answer

A) capital structure of the firm. 
B) total cash flows of the firm. 
C) percentage of a firm to which the bondholders have a claim. 
D) tax claim placed on the firm by the government. 
E) size of the stockholders claims on the firm. 
A) capital structure of the firm. 
B) total cash flows of the firm. 
C) percentage of a firm to which the bondholders have a claim. 
D) tax claim placed on the firm by the government. 
E) size of the stockholders claims on the firm.

Question 4

Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34%
Personal tax rate on income from bonds: 10%
Personal tax rate on income from stocks: 50%

Accepted Answer

A) $-0.050 
B) $-0.188 
C) $0.367 
D) $0.633 
E) None of the above 
A) $-0.050 
B) $-0.188 
C) $0.367 
D) $0.633 
E) None of the above

Question 5

Wigdor Manufacturing is currently all equity financed, has an EBIT of $2 million, and is in the 34% tax bracket. Louis, the company's founder, is the lone shareholder.
-Assume that all earnings are paid out as dividends.Now consider the fact that Louis must pay personal tax on the firm's cash flow.Louis pays taxes on interest at a rate of 33%, but pays taxes on dividends at a rate of 28%.Calculate the total cash flow to Louis after he pays personal taxes.

Accepted Answer

None

Question 6

Corporations in the U.S.tend to:

Accepted Answer

A) minimize taxes. 
B) underutilize debt. 
C) rely less on equity financing than they should. 
D) have extremely high debt-equity ratios. 
E) rely more heavily on bonds than stocks as the major source of financing. 
A) minimize taxes. 
B) underutilize debt. 
C) rely less on equity financing than they should. 
D) have extremely high debt-equity ratios. 
E) rely more heavily on bonds than stocks as the major source of financing.

Question 7

Holly Berry Incorporated debtholders are promised payments of $25 if the firm does well, but will receive only $20 if the firm does poorly.Bondholders are willing to pay $15.The promised return to the bondholders is approximately:

Accepted Answer

A) 5.65% 
B) 45.65% 
C) 50.00% 
D) 66.67% 
E) 100.00% 
A) 5.65% 
B) 45.65% 
C) 50.00% 
D) 66.67% 
E) 100.00%

Question 8

In general, the capital structures used by U.S.firms:

Accepted Answer

A) tend to overweigh debt in relation to equity. 
B) are easily explained in terms of earnings volatility. 
C) are easily explained by analyzing the types of assets owned by the various firms. 
D) tend to be those which maximize the use of the firm's available tax shelters. 
E) vary significantly across industries. 
A) tend to overweigh debt in relation to equity. 
B) are easily explained in terms of earnings volatility. 
C) are easily explained by analyzing the types of assets owned by the various firms. 
D) tend to be those which maximize the use of the firm's available tax shelters. 
E) vary significantly across industries.

Question 9

Consider an economy in which there are three groups of investors and no others.
$$\begin{array} { l l c } 
& \underline{\text { Marginal tax rate }} & \underline{\text { Personal wealth }} \
 \text { Group } & \text { on bonds } & \text { (\$ millions) } \
\text { Plumbers } & 60 \% & 2,500 \
\text { Doctors } & 50 \% & 700 \
\text { Lawyers } & 40 \% & 100
\end{array}$$ There are no personal taxes on income from stocks.An investment is available that pays a tax-free 4%.The corporate tax rate is 50%.Total corporate income before earnings and taxes (EBIT) is $224 million forever.What is the maximum debt-to-equity ratio for the economy as a whole?

Accepted Answer

The interest rate on debt = .04/(1 - .5

An investment is available that pays a tax-free 7%.The corporate tax rate is 40%.Ignoring risk, what is the pre-tax return on taxable bonds?

Which of the following is true?

The basic lesson of MM theory is that the value of a firm is dependent upon the:

Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 10% Personal tax rate on income from stocks: 50%

Corporations in the U.S.tend to:

Holly Berry Incorporated debtholders are promised payments of $25 if the firm does well, but will receive only $20 if the firm does poorly.Bondholders are willing to pay $15.The promised return to the bondholders is approximately:

In general, the capital structures used by U.S.firms:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Long-Term Planning

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, Cost of Capital, and Capital Budgeting

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Securities to the Public

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

Exam 17: Capital Structure: Limits to the Use of Debt

An investment is available that pays a tax-free 7%.The corporate tax rate is 40%.Ignoring risk, what is the pre-tax return on taxable bonds?

Which of the following is true?

The basic lesson of MM theory is that the value of a firm is dependent upon the:

Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 10% Personal tax rate on income from stocks: 50%

Corporations in the U.S.tend to:

Holly Berry Incorporated debtholders are promised payments of $25 if the firm does well, but will receive only $20 if the firm does poorly.Bondholders are willing to pay $15.The promised return to the bondholders is approximately:

In general, the capital structures used by U.S.firms:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Long-Term Planning

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, Cost of Capital, and Capital Budgeting

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Securities to the Public

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters