Question 1

After seeing Steve's analysis,Mike tells Steve that while his analysis looks good on paper,Steve will never be able to borrow at 8%,but would have to pay a more realistic rate of 12%.If Mike is right,what will Steve's payout be?

Accepted Answer

The answer of After seeing Steve's analysis,Mike tells Steve that...

Question 2

A firm has a debt-to-equity ratio of 1.Its cost of equity is 16%,and its cost of debt is 8%.If there are no taxes or other imperfections,what would be its cost of equity if the debt-to-equity ratio were 0?

Accepted Answer

A) 8% 
B) 10% 
C) 12% 
D) 14% 
E) 16%

Question 3

The Backwoods Lumber Co.has a debt-equity ratio of .80.The firm's required return on assets is 12% and its cost of equity is 16.00%.What is the pre-tax cost of debt based on MM Proposition II with no taxes?

Accepted Answer

A) 6.76% 
B) 7.00% 
C) 7.25% 
D) 7.40% 
E) 7.50%

Question 4

A firm should select the capital structure which:

Accepted Answer

A) produces the highest cost of capital. 
B) has no debt. 
C) is fully unlevered. 
D) minimizes taxes. 
E) maximizes the value of the firm.

Question 5

The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called:

Accepted Answer

A) private debt placement. 
B) the weighted average cost of capital. 
C) dividend recapture. 
D) homemade leverage. 
E) personal offset.

Question 6

The firm's capital structure refers to:

Accepted Answer

A) the way a firm invests its assets. 
B) the amount of capital in the firm. 
C) the amount of dividends a firm pays. 
D) the mix of debt and equity used to finance the firm's assets. 
E) how much cash the firm holds.

Question 7

In an EPS-EBI graphical relationship,the slope of the debt ray is steeper than the equity ray.The debt ray has a lower intercept because:

Accepted Answer

A) more shares are outstanding for the same level of EBI. 
B) the break-even point is higher with debt. 
C) a fixed interest charge must be paid even at low earnings. 
D) the amount of interest per share has only a positive effect on the intercept. 
E) the higher the interest rate the greater the slope.

Question 8

Based on MM with taxes and without taxes,how much time should a financial manager spend analyzing the capital structure of his firm?

Accepted Answer

The answer of Based on MM with taxes and without...

Question 9

The Nantucket Nugget is unlevered and is valued at $640,000.Nantucket is currently deciding whether including debt in its capital structure would increase its value.The current cost of equity is 12%.Under consideration is issuing $300,000 in new debt with an 8% interest rate.Nantucket would repurchase $300,000 of stock with the proceeds of the debt issue.There are currently 32,000 shares outstanding and its effective marginal tax bracket is zero.What will Nantucket's new WACC be?

Accepted Answer

The answer of The Nantucket Nugget is unlevered and is...

Question 10

Hey Guys!,Inc.has debt with both a face and a market value of $3,000.This debt has a coupon rate of 7% and pays interest annually.The expected earnings before interest and taxes is $1,200,the tax rate is 34%,and the unlevered cost of capital is 12%.What is the firm's cost of equity?

Accepted Answer

A) 13.25% 
B) 13.89% 
C) 13.92% 
D) 14.14% 
E) 14.25%

Question 11

A firm has a debt-to-equity ratio of 1.Its cost of equity is 16%,and its cost of debt is 8%.If the corporate tax rate is 25%,what would its cost of equity be if the debt-to-equity ratio were 0?

Accepted Answer

A) 11.11% 
B) 12.57% 
C) 13.33% 
D) 16.00% 
E) None of the above.

Question 12

In a world of no corporate taxes if the use of leverage does not change the value of the levered firm relative to the unlevered firm this is known as:

Accepted Answer

A) MM Proposition III that the cost of stock is less than the cost of debt. 
B) MM Proposition I that leverage is invariant to market value. 
C) MM Proposition II that the cost of equity is always constant. 
D) MM Proposition I that the market value of the firm is invariant to the capital structure. 
E) MM Proposition III that there is no risk associated with leverage in a no tax world.

Question 13

Wild Flowers Express has a debt-equity ratio of .60.The pre-tax cost of debt is 9% while the unlevered cost of capital is 14%.What is the cost of equity if the tax rate is 34%?

Accepted Answer

A) 7.52% 
B) 8.78% 
C) 15.98% 
D) 16.83% 
E) 17.30%

Question 14

A firm has a debt-to-equity ratio of 1.75.If it had no debt,its cost of equity would be 14%.Its cost of debt is 10%.What is its cost of equity if the corporate tax rate is 50%?

Accepted Answer

A) 14.0% 
B) 16.0% 
C) 17.5% 
D) 21.0% 
E) None of the above.

Question 15

Walter's Distributors have a cost of equity of 13.84% and an unlevered cost of capital of 12%.The company has $5,000 in debt that is selling at par value.The levered value of the firm is $12,000 and the tax rate is 34%.What is the pre-tax cost of debt?

Accepted Answer

A) 7.92% 
B) 8.10% 
C) 8.16% 
D) 8.84% 
E) 9.00%

Question 16

The proposition that the value of a levered firm is equal to the value of an unlevered firm is known as:

Accepted Answer

A) static theory proposition. 
B) MM Proposition I with no tax. 
C) MM Proposition II with no tax. 
D) MM Proposition I with tax. 
E) MM Proposition II with tax.

Question 17

A firm has $60,000 of debt outstanding that is selling at par and has a coupon rate of 8%.The tax rate is 40%.What is the present value of the tax shield?

Accepted Answer

A) $1,760 
B) $4,400 
C) $24,000 
D) $33,000 
E) $60,000

Question 18

Your firm has a pre-tax cost of debt of 8% and an unlevered cost of capital of 13%.Your tax rate is 35% and your cost of equity is 15.26%.What is your debt-equity ratio?

Accepted Answer

A) .61 
B) .66 
C) .70 
D) .74 
E) .78

Question 19

The Spartan Co.has an unlevered cost of capital of 11%,a cost of debt of 8%,and a tax rate of 35%.What is the target debt-equity ratio if the targeted cost of equity is 12.5%?

Accepted Answer

A) .44 
B) .49 
C) .51 
D) .66 
E) .77

Question 20

MM Proposition II is the proposition that:

Accepted Answer

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 capital is a positive linear function of the firm's capital structure. 
C) the cost of equity depends on the return on debt, the debt-equity ratio and the tax rate. 
D) the cost of equity is equivalent to the required return on the total assets of a firm. 
E) supports the argument that the size of the pie does not depend on how the pie is sliced.

Exam 14: Capital Structure: Basic Concepts