Exam 13: Leverage and Capital Structure
Exam 1: Introduction to Financial Management49 Questions
Exam 2: Financial Statements, Taxes, and Cash Flow49 Questions
Exam 3: Working With Financial Statements47 Questions
Exam 4: Introduction to Valuation: the Time Value of Money47 Questions
Exam 5: Discounted Cash Flow Valuation50 Questions
Exam 6: Interest Rates and Bond Valuation49 Questions
Exam 7: Equity Markets and Stock Valuation50 Questions
Exam 8: Net Present Value and Other Investment Criteria47 Questions
Exam 9: Making Capital Investment Decisions50 Questions
Exam 10: Some Lessons From Capital Market History50 Questions
Exam 11: Risk and Return48 Questions
Exam 12: Long-Term Financing50 Questions
Exam 13: Leverage and Capital Structure49 Questions
Exam 14: Dividends and Dividend Policy50 Questions
Exam 15: Raising Capital38 Questions
Exam 16: Short-Term Financial Planning50 Questions
Exam 17: Working Capital Management50 Questions
Exam 18: International Aspects of Financial Management48 Questions
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Which one of the following is correct based on the static theory of capital structure?
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(Multiple Choice)
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Correct Answer:
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)
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Correct Answer:
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)
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Correct Answer:
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)
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Which one of the following conditions exists at the point where a firm maximises its value?
(Multiple Choice)
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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)
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Which one of the following is an implication of M&M Proposition II,without taxes?
(Multiple Choice)
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The legal and administrative costs of bankruptcy are called _____ bankruptcy costs.
(Multiple Choice)
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Which one of the following statements related to the static theory of capital structure is correct?
(Multiple Choice)
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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)
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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)
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Which one of the following statements is the core principle of M&M Proposition I,without taxes?
(Multiple Choice)
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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)
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M&M Proposition I,with taxes,states that the value of a levered (VL)firm is equal to:
(Multiple Choice)
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Which one of the following will generally receive the highest priority in a bankruptcy liquidation,assuming the absolute priority rule is followed?
(Multiple Choice)
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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)
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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)
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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)
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