Exam 13: Leverage and Capital Structure

Which of the following statements correctly relate to M&M Proposition I,with taxes? I.Debt decreases the value of a firm. II.The levered value of a firm exceeds the firm's unlevered value. III.The weighted average cost of capital (WACC)is constant. IV.The optimal capital structure is zero debt.

Which one of the following is the theory that a firm should borrow up to the point where the additional tax benefit from an extra dollar of debt equals the additional costs associated with financial distress from that additional debt?

Day 'n Nite currently has 25 000 shares of stock outstanding and no debt.The price per share is $20.The firm is considering borrowing funds at 8 per cent interest and using the proceeds to repurchase 5000 shares of stock.Ignore taxes.How much is the firm borrowing?

Which one of the following terms refers to the termination of a firm as a going concern?

A firm's optimal capital structure:

Barrier Reef Island Resorts has no debt.Its current total value is $58 million.What will the company's value be if it sells $21 million in debt securities and has a tax rate of 30 per cent,assuming that the proceeds will be used to purchase equity?

The use of borrowing by an individual to adjust his or her overall exposure to financial leverage is referred to as:

Blue & Co.is an all-equity firm with a total market value of $230 000.The firm has 25 000 shares outstanding.Management is considering issuing $100 000 of debt at an interest rate of 7 per cent and using the proceeds to repurchase shares.Management estimates that the economy will be fairly normal and thus the firm's earnings before interest and taxes (EBIT)will be $60 000.Ignore taxes.What are the anticipated earnings per share (EPS)if the debt is issued?

Eastcoast Transport Ltd can borrow at 7.5 per cent.The firm currently has no debt,and the cost of equity is 16 per cent.The current value of the firm is $540 000.What will the value be if the firm borrows $160 000 and uses the proceeds to repurchase shares? The corporate tax rate is 34 per cent.

Bankruptcy is best defined as:

If we observe capital structures across the industries in Australia,what industry typically has the highest debt-equity ratios,excluding banks?

Southern Fried Foods has a $12 million bond issue outstanding with a coupon rate of 6.75 per cent and a yield-to-maturity of 7.27 per cent.What is the present value of the tax shield if the tax rate is 35 per cent?

Which of the following will increase the value of a levered firm according to M&M Proposition I,with taxes? I.decrease in the amount of the debt II.increase in the value of the unlevered firm III.decrease in the tax rate IV.increase in the interest rate on the debt

Which one of the following statements matches M&M Proposition I?

Which one of the following is the equity risk arising from the capital structure selected by a firm?

Assume that you are comparing two firms which are identical,with one exception.Firm A is an all-equity firm and firm B has a debt-equity ratio of 0.60.All else equal,firm A will:

Manly Manufacturing is comparing two different capital structures.Plan I would result in 23 000 shares and $320 000 in debt.Plan II would result in 17 000 shares and $260 000 in debt.The interest rate on the debt is 10 per cent.Ignoring taxes,EPS will be identical for Plans I and II when EBIT equals which one of the following?

Which one of the following is the equity risk arising from the daily operations of a firm?

Which one of the following represents the present value of the interest tax shield?

Paying interest reduces the taxes owed by a firm.Which one of the following terms applies to this relationship?