Exam 13: Leverage and Capital Structure

arrow
  • Select Tags
search iconSearch Question
flashcardsStudy Flashcards
  • Select Tags

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

Free
(Multiple Choice)
5.0/5
(39)
Correct Answer:
Verified

E

The corporate tax rate is 37%.The MaPol Company has a $100 million debenture issue outstanding with a coupon rate of 6.84% per annum.Face value of one debenture is $10 000 and investors require a 7% return on debentures with similar credit rating.What is the present value of the tax shield?

Free
(Multiple Choice)
4.8/5
(30)
Correct Answer:
Verified

E

Stone House Cafe has a 30 per cent tax rate and total taxes of $35 280.What is the value of the interest tax shield if the interest expense is $16 700?

Free
(Multiple Choice)
4.8/5
(35)
Correct Answer:
Verified

A

Kelner's Nursery has 8000 bonds outstanding with a face value of $1000 each.The coupon rate is 6.5 per cent and the tax rate is 34 per cent.What is the present value of the interest tax shield?

(Multiple Choice)
4.9/5
(30)

Which one of the following conditions exists at the point where a firm maximises its value?

(Multiple Choice)
4.9/5
(39)

You are comparing two financial policies.The first is all equity.The second involves the use of $2 million of debt.The break-even point between these two policies occurs when the earnings before interest and taxes (EBIT)is $450 000.Given this,it is accurate to say that leverage _____ beneficial to the firm when EBIT is $325 000 and _____ beneficial when EBIT is $625 000.

(Multiple Choice)
4.9/5
(38)

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

(Multiple Choice)
4.8/5
(38)

The legal and administrative costs of bankruptcy are called _____ bankruptcy costs.

(Multiple Choice)
4.8/5
(39)

Which one of the following statements related to the static theory of capital structure is correct?

(Multiple Choice)
4.9/5
(44)

Ettalong Electrical Company Ltd has 9000 shares outstanding and no debt.The new CFO is considering issuing $80 000 of debt and using the proceeds to retire 1500 shares.The coupon rate on the debt is 7.5 per cent.What is the break-even level of earnings before interest and taxes between these two capital structure options if the tax rate is 30 per cent?

(Multiple Choice)
4.7/5
(31)

Which one of the following supports the theory that the value of a firm increases as the firm's level of debt increases?

(Multiple Choice)
4.8/5
(36)

Which one of the following statements is the core principle of M&M Proposition I,without taxes?

(Multiple Choice)
4.8/5
(34)

Bartlett Specialists is considering two different capital structures.The first option consists of 15 000 shares of stock.The second option consists of 9000 shares of stock plus $80 000 of debt at an interest rate of 7.5 per cent.Ignore taxes.What is the break-even level of earnings before interest and taxes (EBIT)between these two options?

(Multiple Choice)
4.8/5
(46)

M&M Proposition I,with taxes,states that the value of a levered (VL)firm is equal to:

(Multiple Choice)
4.8/5
(39)

Which one of the following will generally receive the highest priority in a bankruptcy liquidation,assuming the absolute priority rule is followed?

(Multiple Choice)
4.8/5
(37)

When is a firm insolvent from an accounting perspective?

(Multiple Choice)
4.8/5
(37)

Kline Construction is an all-equity firm that has projected perpetual earnings before interest and taxes of $879 000.The current cost of equity is 18.3 per cent and the tax rate is 34 per cent.The company is in the process of issuing $6.2 million of 8.5 per cent annual coupon bonds at par.What is the levered value of the firm?

(Multiple Choice)
4.8/5
(38)

The BaPol Company has a cost of equity of 14% and a weighted average cost of capital of 13.02%.What is the company's cost of debt,if BaPol Company maintains the debt-equity ratio of 0.44? Consider that there are no taxes.

(Multiple Choice)
4.7/5
(39)

The static theory of capital structure assumes a firm:

(Multiple Choice)
4.9/5
(33)

Brown's Department Store has a cost of equity of 19.1 per cent,a pre-tax cost of debt of 8 per cent,and a return on assets of 14 per cent.Ignore taxes.What is the debt-equity ratio?

(Multiple Choice)
4.8/5
(27)
Showing 1 - 20 of 49
close modal

Filters

  • Essay(0)
  • Multiple Choice(0)
  • Short Answer(0)
  • True False(0)
  • Matching(0)