Deck 14: Capital Structure: Basic Concepts

Question 1

Which of the following are given as reasons why individual investors may be able to borrow at the same rates as corporations? I.Corporate loans must be negotiated and supervised.
II)Corporations often borrow using illiquid assets as collateral.
III)Individuals tend to borrow smaller amounts.
IV)Individuals can borrow on margin through a broker.

A)I and II only
B)III and IV only
C)II,III,and IV only
D)I,II,and IV only
E)I,II,III,and IV

Answer 1

I,II,and IV only

Question 2

Which one of these argues than the value of a firm is independent of its capital structure?

A)MM Proposition I,without taxes
B)MM Proposition II,without taxes
C)MM Proposition I,with taxes
D)MM Proposition II,with taxes
E)None of the MM Propositions

Answer 2

MM Proposition I,without taxes

Question 3

Shareholders value firms based on their

A)sizes.
B)profits.
C)original costs.
D)depreciated values.
E)market values.

Answer 3

market values.

Question 4

You are writing a comparison of an all-equity structure to a levered capital structure for a firm.It is accurate to state in this comparison that

A)earnings per share will always be higher in the all-equity structure.
B)firms will only select the levered structure when individual rates on borrowed funds are lower than corporate rates.
C)leverage lowers shareholders' returns in bad financial times.
D)the all-equity firm has a greater advantage the higher the firm's earnings before interest.
E)leverage improves shareholders' returns regardless of the firm's level of earnings.

Question 5

An unlevered firm is a company that

A)pays no current dividends.
B)has only one geographic location.
C)has no debt.
D)produces a single product.
E)is undervalued based on its current capital structure.

Question 6

A firm's capital structure refers to the

A)division of a firm's assets into current and fixed assets.
B)amount shareholders have invested into the firm.
C)types of fixed assets owned by the firm.
D)mix of debt and equity used to finance the firm's assets.
E)amount of cash and cash equivalents held by a firm.

Question 7

In the absence of taxes,MM argues that

A)no one capital structure for a firm is superior to any other capital structure for that firm.
B)the cost of equity for a levered firm is equal to the firm's unlevered WACC.
C)homemade leverage is insufficient to offset a firm's use of leverage.
D)the value of a levered firm exceeds the value of the unlevered firm.
E)the cost of equity decreases as the debt-equity ratio increases.

Question 8

Assume you are reviewing a graph depicting earnings per share (EPS)on the vertical axis and earnings before interest (EBI)on the horizontal axis.Data points for both a levered and an unlevered firm are displayed.Given this,which statement accurately describes this graph?

A)The unlevered firm has a greater reaction to a change in EBI than does the levered firm.
B)The levered firm consistently has higher EPS than the unlevered firm.
C)Both the levered and unlevered firms have zero EPS when EBI is zero.
D)Debt becomes a greater disadvantage to a firm as EBI increases.
E)When earnings exceed the breakeven point,the levered firm has the higher EPS.

Question 9

When selecting a capital structure,managers should aim to maximize the

A)tax deductions that are available to the company.
B)value of the firm for its managers and employees.
C)size of the firm.
D)value of the firm for its shareholders.
E)growth rate of the company.

Question 10

Ignoring taxes,financial leverage affects the performance of a firm by

A)increasing the volatility of the firm's EBI.
B)decreasing the volatility of the firm's EBI.
C)decreasing the volatility of the firm's net income.
D)increasing the volatility of the firm's EPS.
E)lowering the firm's level of risk.

Question 11

Which one of these statements is correct?

A)There is no condition known to date whereby a corporation can increase firm value through the use of leverage.
B)Corporations generally pay a lower cost on debt than do individuals due to their vast pool of liquid assets.
C)If individuals pay a higher cost to borrow than corporations do,then corporations can increase firm value by borrowing.
D)Margin accounts tend to be high interest rate sources of funds for individuals.
E)Corporations can increase firm value by borrowing provided their interest rate on debt exceeds that paid by individuals.

Question 12

MM Proposition I,without taxes,illustrates that

A)the value of an unlevered firm is greater than that of a levered firm.
B)any one capital structure is just as valuable as any other capital structure for a given firm.
C)corporate use of homemade leverage affects the value of the firm to its shareholders.
D)the value of a firm is directly related to the use of debt.
E)firm valuation is dependent upon shareholders aversion to homemade leverage.

Question 13

Managers should select the capital structure that

A)maximizes the value of the firm.
B)has no debt.
C)is fully levered.
D)minimizes taxes.
E)produces the highest current level of net income.

Question 14

MM Proposition I,without taxes,assumes that

A)debt is riskless.
B)individuals and corporations can borrow at the same rate.
C)firms can borrow at the risk-free rate.
D)individuals and firms are taxed at the same rate thereby making taxes irrelevant.
E)all firms will prefer an unlevered capital structure.

Question 15

When comparing levered versus unlevered capital structures,leverage works to increase EPS for high levels of EBIT because interest payments on the debt

A)increase as EBIT increases.
B)stay fixed,leaving more income to be distributed over fewer shares.
C)stay fixed,leaving less income to be distributed over fewer shares.
D)stay fixed,leaving less income to be distributed over more shares.
E)decrease as EBIT increases.

Question 16

In an EPS-EBI graphical relationship,the debt line and the no debt line intersect.Which one of these is true at the intersection point?

A)The advantages of debt outweigh the disadvantages of debt.
B)The aftertax earnings of both capital structures are equal.
C)The earnings per share for both capital structures equal zero.
D)There is no advantage or disadvantage to debt.
E)The EPS is maximized for both the levered and the unlevered firm.

Question 17

The use of leverage by a firm

A)increases the variability of EBIT.
B)replaces all use of homemade leverage.
C)increases shareholder risk.
D)affects EBIT more than net income.
E)increases EPS at low levels of income.

Question 18

Ignoring taxes,leverage becomes a disadvantage to a firm as soon as the firm's earnings before interest

A)become negative.
B)exceed the breakeven point.
C)exceed the interest expense.
D)exceed the firm's unlevered earnings.
E)fall below the breakeven point.

Question 19

MM Proposition I,without taxes,supports the argument that

A)business risk determines the return on assets.
B)it is completely irrelevant how a firm arranges its finances.
C)the cost of equity rises as leverage rises.
D)a firm should borrow money up to the point where the cost of debt equals the cost of equity.
E)financial risk is determined by the debt-equity ratio.

Question 20

A general rule for managers to follow is to establish a firm's capital structure such that the firm's

A)cost of equity is minimized.
B)bondholders are fully secured.
C)current market value is maximized.
D)dividend payout is maximized.
E)assets are minimized.

Question 21

Which one of these events might cause the biggest challenge to the MM propositions?

A)An increase in the corporate tax rates
B)A decrease in the cost of debt
C)An increase in a firm's unlevered WACC
D)A new law requiring equal lending rates for all borrowers
E)A change in tax laws to treat interest and dividends equally

Question 22

R₀ is defined as the

A)cost of capital for an unlevered firm.
B)pretax cost of debt.
C)cost of capital in a risk-free world without taxes.
D)cost of capital for a fully levered firm.
E)aftertax cost of debt.

Question 23

What does the present value of the tax shield from debt formula assume?

A)The interest rate on the debt is less than cost of equity.
B)The debt will not be replaced when paid.
C)Interest on the debt is paid only when the debt matures.
D)The interest is paid semiannually.
E)The debt is perpetual.

Question 24

Consider the pie models of corporate structure.What is the difference between the all-equity pie and the levered pie for a firm in the presence of taxes?

A)The size of the levered pie is smaller than the all-equity pie.
B)Taxes eat a slice of the levered pie but pass by the all-equity pie.
C)Both pies are the same size and are sliced identically.
D)Taxes eat a slice of both pies but take a larger slice of the all-equity pie.
E)The all-equity pie is smaller in size than the levered pie.

Question 25

Which one of these presents the idea that the cost of equity is a positive linear function of capital structure?

A)MM Proposition I,without taxes
B)MM Proposition II,without taxes
C)Capital asset pricing model
D)MM Proposition I,with taxes
E)Homemade leverage

Question 26

Which one of these represents the difference between the value of a levered and an unlevered firm?

A)R₀ - R_S
B)R_S × t_cB
C)V_U + R × t_cB
D)(B / S)(1 - t_c)( R₀ - R_S)
E)t_cB

Question 27

Which one of these symbols is correctly matched with its definition?

A)t_c: Taxable corporate income
B)V_U: Present value of unlevered firm
C)R₀: Levered cost of equity
D)R_WACC: Levered cost of equity
E)R_B: Weight of debt in the capital structure

Question 28

MM Proposition II,without taxes,implies that the required return on equity is

A)a result of homemade leverage.
B)inversely related to the firm's debt-to-equity ratio.
C)directly affected by the firm's debt-to-equity ratio.
D)independent of the firm's capital structure.
E)a linear function of the market's rate of interest.

Question 29

The fact that interest payments on debt are tax deductible is a key factor in which of these propositions?

A)Both MM Proposition I and II,with taxes
B)MM Proposition I,without tax
C)MM Proposition II,without tax
D)MM Proposition I,with tax
E)MM Proposition II,with tax

Question 30

Which one of these statements is correct?

A)Firms across all industries in the U.S.tend to have similar debt-to-equity ratios.
B)The banking industry tends to have the lowest debt-to-equity ratio of any United States industry.
C)Financial leverage lowers risk to equity holders.
D)MM Propositions ignore bankruptcy costs.
E)MM Propositions,without taxes,illustrate that a firm's overall cost of capital is affected by leverage.

Question 31

If R₀ exceeds R_B then

A)R_S increases with leverage.
B)R_WACC increases with leverage.
C)R_S decreases with leverage.
D)R_S remains constant as leverage changes.
E)R_S = R_B.

Question 32

MM Proposition I,with taxes,is based on the concept that the

A)optimal capital structure is the one that is totally financed with equity.
B)capital structure of the firm does not matter because investors can use homemade leverage.
C)firm is worse off levered than unlevered.
D)value of the firm increases as total debt increases because of the interest tax shield.
E)cost of equity increases as the debt-equity ratio of a firm increases.

Question 33

MM Proposition II,without taxes,is the proposition that

A)supports the argument that the capital structure of a firm is irrelevant to the value of the firm.
B)a firm's cost of equity increases in direct relationship to the increase in debt.
C)the cost of levered equity is determined solely by the return on debt,the debt-equity ratio,and the tax rate.
D)the cost of equity depends on the market value of the firm's assets.
E)supports the argument that the size of the pie does not depend on how the pie is sliced.

Question 34

Given a world without taxes,R_WACC of an unlevered firm will equal

A)R_S.
B)R_B.
C)R₀.
D)R_S - R₀.
E)R_S - R_B.

Question 35

The formula associated with MM Proposition II,without taxes,is

A)R₀ = R_S + (B / S)(R_S - R_B).
B)R_WACC = R_S - R_B.
C)R_s = R₀ + (B / S)(R₀ - R_B).
D)R₀ = R_B - R₀.
E)R_WACC = R₀ + R_B.

Question 36

Bryan invested in Bryco stock when the firm was financed solely with equity.The firm is now utilizing debt in its capital structure.To unlever his position,Bryan needs to

A)borrow some money and purchase additional shares of Bryco stock.
B)sell some shares of Bryco stock and loan out the sale proceeds.
C)sell some shares of Bryco stock and hold the proceeds in cash.
D)maintain his current position because the firm's use of leverage did not affect him.
E)sell some of his shares and also borrow money to increase his cash reserves.

Question 37

Why does MM Proposition I,without taxes,not hold in the presence of corporate taxation?

A)Bondholders require higher rates of return when their interest payments are taxed.
B)Dividends are no longer relevant when taxes are introduced.
C)A levered firm will pay less tax than the identical firm unlevered.
D)The cost of equity increases with leverage.
E)The pretax cost of debt increases when taxes are considered.

Question 38

MM Proposition II,with taxes

A)reaches the final conclusion that the capital structure decision is irrelevant to the value of a firm.
B)reveals how the interest tax shield relates to the value of a firm.
C)supports the argument that business risk is determined by the capital structure employed by a firm.
D)has the same general implications as MM Proposition II,without taxes.
E)supports the argument that the cost of equity decreases as the debt-equity ratio increases.

Question 39

Which one of these proposes that the value of a levered firm exceeds the value of an unlevered firm by the present value of the tax shield?

A)MM Proposition I,with and without taxes
B)MM Proposition I,with tax
C)MM Proposition II,with tax
D)MM Proposition I,without tax
E)MM Proposition II,without tax

Question 40

MM Proposition I,with tax,supports the theory that

A)the value of an unlevered firm is equal to the value of a levered firm plus the interest tax shield.
B)the value of a firm is inversely related to the amount of leverage used by the firm.
C)there is a positive linear relationship between the debt-to-equity ratio and firm value.
D)a firm's cost of capital is the same regardless of the mix of debt and equity used by the firm.
E)a firm's weighted average cost of capital increases as the debt-equity ratio of the firm increases.

Question 41

An unlevered firm has expected earnings of $37,584 and a market value of equity of $324,000.The firm is planning to issue $65,000 of debt at 6.6 percent interest and use the proceeds to repurchase shares at their current market value.Ignore taxes.What will be the cost of equity after the repurchase?

A)12.85%
B)13.58%
C)13.40%
D)12.04%
E)12.48%

Question 42

Durbin,Inc.,is an unlevered firm with a total market value of $460,000 and 40,000 shares of stock outstanding.The firm has expected EBIT of $48,000 if the economy is normal and $56,000 if the economy booms.The firm is considering a bond issue of $57,500 with an attached interest rate of 6.8 percent.The bond proceeds will be used to repurchase shares.Ignore taxes.What will be the earnings per share after the repurchase if the economy booms?

A)$1.49
B)$1.63
C)$1.45
D)$1.54
E)$1.68

Question 43

Presley Cleaners has an all-equity capital structure with an equity value of $94,260.The expected earnings are $11,320 based on estimated sales of $60,000.The firm pays no taxes and can borrow at 6.4 percent.What is the value of R_WACC?

A)12.01%
B)12.29%
C)11.83%
D)12.34%
E)12.16%

Question 44

A firm has zero debt and an overall cost of capital of 11.7 percent.The firm is considering a new capital structure with 45 percent debt at an interest rate of 6.8 percent.Assume there are no taxes or other imperfections.What will be the levered cost of equity?

A)16.47%
B)14.67%
C)15.80%
D)15.71%
E)16.16%

Question 45

A firm has a debt-equity ratio of 0.45,an unlevered WACC of 12.68 percent,and a pretax cost of debt of 6.8 percent.What is the levered cost of equity if there are no taxes or other imperfections?

A)13.68%
B)15.58%
C)15.33%
D)13.72%
E)14.67%

Question 46

A firm has a debt-equity ratio of 1.Its cost of equity is 17.4 percent and its pretax cost of debt is 7.2 percent.Assume there are no taxes or other imperfections.What would be its cost of equity if the debt-equity ratio were zero?

A)8)8%
B)10.9%
C)12.3%
D)13.1%
E)11.6%

Question 47

The interest tax shield has no value for a firm when the I.tax rate is equal to zero.
II)debt-equity ratio is exactly equal to 1.
III)firm is unlevered.
IV)firm elects an all-equity capital structure.

A)I and III only
B)II and IV only
C)I,III,and IV only
D)II,III,and IV only
E)I,II,and IV only

Question 48

Simpson's is an all-equity firm that has 400,000 shares of stock outstanding.The company is in the process of borrowing $1.5 million at 5 percent interest to repurchase 30,000 of the firm's outstanding shares.Ignore taxes.What will be the market value of equity after the repurchase?

A)$20.0 million
B)$19.2 million
C)$18.5 million
D)$19.8 million
E)$18.9 million

Question 49

The interest tax shield is a key reason why

A)the value of an unlevered firm is equal to the value of a levered firm.
B)the net cost of debt to a firm is generally less than the cost of equity.
C)firms tend to minimize their borrowing.
D)the cost of debt is equal to the cost of equity for a firm with a debt-to-equity ratio of 1.
E)firms prefer equity financing over debt financing.

Question 50

The MM propositions would suggest that firms should prefer which one of these debt-to-equity ratios?

A)0)0
B)0)1
C)0)5
D)0)7
E)0)9

Question 51

Hazlett's is an unlevered firm with a total market value of $280,000 and 10,000 shares of stock outstanding.The firm has expected EBIT of $16,000 if the economy is normal and $19,000 if the economy booms.The firm is considering a bond issue of $42,000 with an attached interest rate of 7.3 percent.The bond proceeds will be used to repurchase shares.The tax rate is 35 percent.What will be the earnings per share after the repurchase if the economy is normal?

A)$1.27
B)$0.63
C)$0.99
D)$1.05
E)$1.18

Question 52

An all-equity firm has expected earnings of $14,200 and a market value of $82,271.The firm is planning to issue $15,000 of debt at 6.3 percent interest and use the proceeds to repurchase shares at their current market value.Ignore taxes.What will be the cost of equity after the repurchase?

A)17.99%
B)18.08%
C)19.70%
D)18.97%
E)19.55%

Question 53

LT Transport is an unlevered firm with a total market value of $672,000 and 50,000 shares of stock outstanding.The firm has expected EBIT of $64,500 if the economy is normal and $73,000 if the economy booms.The firm is considering a bond issue of $33,600 with an attached interest rate of 7.6 percent.The bond proceeds will be used to repurchase shares.The tax rate is 34 percent.What is the percentage increase in EPS if the economy booms rather than be normal?

A)10.78%
B)11.42%
C)12.84%
D)10.28%
E)13.72%

Question 54

Delta Mills and Franklin Mill are identical firms except for their capital structures.Delta is an unlevered firm with $680,000 of equity.Franklin is a levered firm with $425,000 of equity and $255,000 of debt at an interest rate of 6.2 percent.Both Delta and Franklin have an expected EBIT of $84,000.Ignore taxes.Delta has a WACC of ________ percent and Franklin's WACC is ________ percent.

A)12.35;11.05
B)12.35;14.10
C)12.35;12.35
D)14.10;14.10
E)16.10;14.10

Question 55

Brown's is an unlevered firm with a total market value of $368,000 and 18,400 shares of stock outstanding.The firm has expected EBIT of $17,500 if the economy is normal and $19,000 if the economy booms.The firm is considering a bond issue of $120,000 with an attached interest rate of 5.9 percent.The bond proceeds will be used to repurchase shares.The tax rate is 34 percent.What will be the earnings per share after the repurchase if the economy booms?

A)$0.92
B)$0.84
C)$0.75
D)$0.59
E)$0.63

Question 56

The Grist Mill has no debt,a total market value of $319,200,and 24,000 shares of stock outstanding.The firm has expected EBIT of $21,000 if the economy is normal and $24,000 if the economy booms.The firm is considering a bond issue of $79,800 with an attached interest rate of 5.9 percent.The bond proceeds will be used to repurchase shares.The tax rate is 35 percent.What is the percentage increase in EPS if the economy booms rather than be normal?

A)18.78%
B)18.67%
C)19.34%
D)18.41%
E)19.29%

Question 57

Sewing World has an all-equity cost of capital of 11.72 percent,a levered cost of equity of 12.94 percent,and a pretax cost of debt of 6.8 percent.What is the firm's levered debt-equity ratio if you ignore taxes?

A)0)248
B)0)333
C)0)347
D)0)264
E)0)317

Question 58

Wilt's has a debt-equity ratio of 0.48,a pretax cost of debt of 7.3 percent,and an unlevered cost of capital of 14.1 percent.What is its levered cost of equity if there are no taxes or other imperfections?

A)19.65%
B)15.55%
C)18.20%
D)17.36%
E)16.45%

Question 59

Marley's is an unlevered firm with a total market value of $220,000 and 5,000 shares of stock outstanding.The firm has expected EBIT of $10,000 if the economy is normal and $12,000 if the economy booms.The firm is considering a bond issue of $88,000 with an attached interest rate of 5.9 percent.The bond proceeds will be used to repurchase shares.Ignore taxes.What will be the earnings per share after the repurchase if the economy booms?

A)$1.55
B)$1.61
C)$2.27
D)$2.48
E)$2.36

Question 60

The Border Crossing has no debt and a cost of capital of 12.2 percent.The shareholders would prefer to earn rate of return of 16.4 percent.What debt-equity ratio will be required to meet the shareholder's preference if the firm pays no taxes and can borrow at 6.2 percent?

A)67%
B)33%
C)54%
D)46%
E)70%

Question 61

Andrea's Markets has debt of $318,200,equity of $493,500,an aftertax cost of debt of 6.80 percent,a cost of equity of 13.39 percent,and a tax rate of 34 percent.What is the firm's weighted average cost of capital?

A)9)90%
B)10.94%
C)9)87%
D)10.81%
E)10.05%

Question 62

Travel Express has a debt-equity ratio of 0.42.The pretax cost of debt is 7.1 percent while the unlevered cost of capital is 13.6 percent.What is the cost of equity if the tax rate is 34 percent?

A)17.52%
B)13.78%
C)15.40%
D)17.83%
E)14.30%

Question 63

Models and More has a bond issue outstanding with a face value of $215,000.These bonds have a coupon rate of 5.65 percent,pay interest semiannually,and have a current market price quote of 1.01.The tax rate is 34 percent.What is the amount of the annual interest tax shield?

A)$5,125.50
B)$4,130.15
C)$4,176.13
D)$4,171.45
E)$5,297.89

Question 64

An all-equity firm has a cost of capital of 13.3 percent.The firm is considering switching to a debt-equity ratio of 0.35 with a pretax cost of debt of 7.5 percent.The tax rate is 35 percent.What will be the firm's levered cost of equity?

A)15.25%
B)14.21%
C)16.07%
D)14.62%
E)15.38%

Question 65

The Pizza Shoppe has debt with both a face and market value of $24,000 and a coupon rate of 6.4 percent.The expected earnings before interest and taxes are $21,400,the tax rate is 35 percent,and the unlevered cost of capital is 11.4 percent.What is the firm's cost of equity?

A)13.25%
B)12.89%
C)13.92%
D)12.13%
E)14.25%

Question 66

JL Lumber has a debt-equity ratio of 0.47.The firm's required return on assets is 11.8 percent and its current cost of equity is 14.23 percent.What is the firm's pretax cost of debt? Ignore taxes.

A)6)45%
B)6)03%
C)6)55%
D)6)40%
E)6)63%

Question 67

DL Trucking has a cost of equity of 15.4 percent and an unlevered cost of capital of 13.2 percent.The company has $24,000 in debt that is selling at par value.The levered value of the firm is $59,000 and the tax rate is 34 percent.What is the pretax cost of debt?

A)8)75%
B)8)34%
C)7)38%
D)9)20%
E)9)69%

Question 68

An unlevered firm has a cost of capital of 12.46 percent and a tax rate of 35 percent.The firm is considering a new capital structure with 35 percent debt.The interest rate on the debt would be 6.68 percent.What would be the firm's levered cost of capital?

A)14.48%
B)14.78%
C)13.90%
D)14.27%
E)13.94%

Question 69

An unlevered firm has a cost of capital of 13.8 percent and earnings before interest and taxes of $214,560.Assume the firm borrows $430,000 at an interest rate of 5.85 percent.The applicable tax rate is 35 percent.What is the value of the levered firm?

A)$1,209,518.70
B)$1,007,018.11
C)$1,161,108.70
D)$1,246,082.19
E)$1,105,018.11

Question 70

The Border Cafe has a cost of equity of 13.2 percent and a pretax cost of debt of 7.5 percent.The debt-equity ratio is 0.6 and the tax rate is 35 percent.What is the unlevered cost of capital?

A)11.60%
B)12.30%
C)11.97%
D)12.08%
E)10.80%

Question 71

Ernie's has 4,200 bonds outstanding with a face value of $1,000 each,a market value of $1,060 each,and a coupon rate of 7.6 percent.What is the amount of the annual interest tax shield if the tax rate is 35 percent?

A)$118,423
B)$99,714
C)$100,780
D)$111,720
E)$102,250

Question 72

A levered firm has a pretax cost of debt of 6.8 percent and an unlevered cost of capital of 13.4 percent.The tax rate is 34 percent,and the cost of equity is 16.06 percent.What is the debt-equity ratio?

A)0)57
B)0)45
C)0)51
D)0)47
E)0)61

Question 73

Leisure Vacations is an unlevered firm with aftertax net income of $57,980,a cost of capital of 13.2 percent,and a tax rate of 35 percent.What is the value of this firm?

A)$285,507.58
B)$318,906.15
C)$401,008.47
D)$439,242.42
E)$368,511.12

Question 74

The Studio is currently an all-equity firm that has 68,000 shares of stock outstanding with a market price of $36.80 a share.The current cost of equity is 11.7 percent,and the tax rate is 35 percent.The firm is considering adding $750,000 of debt with a coupon rate of 5.8 percent to its capital structure.The debt will be sold at par value.What is the levered value of the equity?

A)$2,014,900
B)$3,035,500
C)$1,785,000
D)$2,005,200
E)$1,806,400

Question 75

Sun Sports has an unlevered cost of capital of 14.3 percent,a cost of debt of 8.7 percent,and a tax rate of 35 percent.What is the target debt-equity ratio if the targeted levered cost of equity is 16.34 percent?

A)0)44
B)0)56
C)0)51
D)0)63
E)0)47

Question 76

Dakota Co.has expected earnings before interest and taxes of $37,800,an unlevered cost of capital of 12.2 percent,debt with a coupon rate of 5.6 percent,and both a book and face value of $24,000.The tax rate is 35 percent.What is the value of the firm?

A)$210,408.15
B)$209,106.11
C)$209,793.44
D)$218,406.11
E)$201,393.44

Question 77

Baker Breads has $428,000 of debt outstanding that is selling at par and has a coupon rate of 6.25 percent.The tax rate is 34 percent.What is the present value of the tax shield?

A)$9,095
B)$10,459
C)$52,760
D)$145,520
E)$147,600

Question 78

The Outlet has an unlevered cost of capital of 15.1 percent,a tax rate of 34 percent,and expected earnings before interest and taxes of $26,100.The company has $25,000 in bonds outstanding that have a coupon rate of 7.6 percent.The bonds are selling at par.What is the cost of equity?

A)14.31%
B)15.08%
C)16.59%
D)14.64%
E)16.37%

Question 79

Alto and Tenor have 17,400 shares of stock outstanding at a market price of $27 per share.The firm also has $140,000 of 6.2 percent bonds outstanding that are selling at par.The firm does not expect to pay taxes for the foreseeable future.The cost of equity is 15.3 percent.What is the value of R_WACC?

A)13.21%
B)17.38%
C)10.83%
D)14.64%
E)11.09%

Question 80

Houston Tools has expected earnings before interest and taxes of $189,400,an unlevered cost of capital of 12.87 percent,and a tax rate of 34 percent.The company has $318,000 of debt that carries a coupon rate of 6.2 percent.The debt is selling at par value.What is the value of this firm?

A)$996,758.89
B)$1,079,402.05
C)$978,758.89
D)$1,113,758.89
E)$1,036,758.89