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

The Do-All-Right Marketing Research firm has promised payments to their bondholders that total $100.The company believes that there is a 85% chance that the cash flow will be sufficient to meet these claims.However,there is a 15% chance that cash flows will fall short,in which case total earnings are expected to be $65.If the bonds sell in the market for $84,what is an estimate of the bankruptcy costs for Do-All-Right? Assume a cost of debt of 10%.

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: 30% Personal tax rate on income from stocks: 30%

The free cash flow hypothesis states:

The optimal capital structure has been achieved when 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: 20% Personal tax rate on income from stocks: 0%

Junk bonds is a term used to describe bonds:

Indirect costs of financial distress:

The optimal capital structure will tend to include more debt for firms with:

When shareholders pursue selfish strategies such as taking large risks or paying excessive dividends,these will result in:

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 30% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 0%

The value of a firm in financial distress is diminished if the firm:

The All-Mine Corporation is deciding whether to invest in a new project.The project would have to be financed by equity,the cost is $2000 and will return $2500 or 25% in one year.The discount rate for both bonds and stock is 15% and the tax rate is zero.The predicted cashflows are $4500 in a good economy,$3000 in an average,economy and $1000 in a poor economy.Each economic outcome is equally likely and the promised debt repayment is $3000.Should the company take the project? What is the value of firm and its components before and after the project addition?