Question 1

Aaron's Tea House has a 32 percent tax rate and an interest tax shield valued at $6,728 for the year. How much did the firm pay in annual interest?

Accepted Answer

A)   $2,153
B)   $2,304
C)   $2,468
D)   $20,507
E)   $21,025F) D) and E)
G) A) and E)

Question 2

Gabe's Market is comparing two different capital structures. Plan I would result in 11,000 shares of stock and $225,000 in debt. Plan II would result in 14,000 shares of stock and $150,000 in debt. The interest rate on the debt is 8 percent. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $45,000. The all-equity plan would result in 20,000 shares of stock outstanding. Of the three plans, the firm will have the highest EPS with _____ and the lowest EPS with _____.

Accepted Answer

A)   Plan I; Plan II
B)   Plan I; all-equity plan
C)   Plan II; Plan I
D)   Plan II; all-equity plan
E)   all-equity plan; Plan IF) A) and E)
G) A) and D)

Question 3

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

Accepted Answer

A)   $283,500
B)   $305,340
C)   $3,053,400
D)   $3,560,000
E)   $4,200,000F) None of the above
G) D) and E)

Question 4

Northwestern Lumber Products currently has 15,000 shares of stock outstanding. Patricia, the financial manager, is considering issuing $120,000 of debt at an interest rate of 6.75 percent. Given this, how many shares of stock will be outstanding once the debt is issued if the break-even level of EBIT between these two capital structure options is $60,000? Ignore taxes.

Accepted Answer

A)   12,975 shares
B)   13,650 shares
C)   14,025 shares
D)   14,550 shares
E)   15,000 sharesF) A) and C)
G) B) and D)

Question 5

The static theory of capital structure assumes a firm:

Accepted Answer

A)   maintains a constant debt-equity ratio.
B)   has an all-equity structure.
C)   is fixed in terms of its assets.
D)   pays no taxes.
E)   is operating at the point where financial distress costs are eliminated.F) D) and E)
G) A) and B)

Question 6

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?

Accepted Answer

A)   M&M Proposition I, with taxes
B)   M&M Proposition II, with taxes
C)   M&M Proposition I, without taxes
D)   Homemade leverage proposition
E)   Static theory of capital structureF) A) and B)
G) A) and C)

Question 7

A prepack:

Accepted Answer

A)   guarantees full payment to all creditors but lengthens the time span of the debt.
B)   is the joint filing of both a bankruptcy filing and a creditor-approved reorganization plan.
C)   protects the interests of both the current creditors and the existing shareholders.
D)   applies only if a firm files under Chapter 7 of the bankruptcy code.
E)   extends the time that a firm is protected by the bankruptcy process.F) B) and D)
G) C) and D)

Question 8

Snow Mountain Resort has a 33 percent tax rate. Its total interest payment for the year just ended was $6.8 million. What is the interest tax shield?

Accepted Answer

A)   $2,006,500
B)   $2,244,000
C)   $2,410,600
D)   $2,525,000
E)   $2,618,000F) B) and C)
G) C) and D)

Question 9

Tree Farms, Inc. currently has 45,000 shares of stock outstanding and no debt. The price per share is $17.50. The firm is considering borrowing funds at 7.5 percent interest and using the proceeds to repurchase 3,000 shares of stock. Ignore taxes. How much is the firm borrowing?

Accepted Answer

A)   $52,500
B)   $75,000
C)   $110,500
D)   $125,000
E)   $135,000F) B) and D)
G) A) and B)

Question 10

Room and Board has determined that $36,000 is the breakeven level of earnings before interest and taxes for the two capital structures it is considering. The one structure consists of all equity with 14,000 shares of stock. The second structure consists of 10,000 shares of stock and $80,000 of debt. What is the interest rate on the debt?

Accepted Answer

A)   7.72 percent
B)   8.19 percent
C)   9.97 percent
D)   11.43 percent
E)   12.86 percentF) D) and E)
G) C) and E)

Question 11

Cross Town Cookies is an all-equity firm with a total market value of $720,000. The firm has 150,000 shares of stock outstanding. Management is considering issuing $200,000 of debt at an interest rate of 7 percent and using the proceeds to repurchase shares. The projected earnings before interest and taxes are $58,600. What are the anticipated earnings per share if the debt is issued? Ignore taxes.

Accepted Answer

A)   $0.25
B)   $0.33
C)   $0.38
D)   $0.41
E)   $0.47F) B) and D)
G) B) and C)

Question 12

Gabella's is an all-equity firm that has 21,000 shares of stock outstanding at a market price of $40 a share. The firm has earnings before interest and taxes of $84,000 and has a 100 percent dividend payout ratio. Ignore taxes. Gabella's has decided to issue $160,000 of debt at a rate of 12 percent and use the proceeds to repurchase shares. Travis owns 500 shares of Gabella's stock and has decided to continue holding those shares. How will Gabella's debt issue affect Travis' annual dividend income?

Accepted Answer

A)   Decrease from $2,400 to $1,840
B)   Increase from $2,400 to $2,160
C)   Decrease from $2,000 to $1,906
D)   Increase from $2,000 to $2,094
E)   No changeF) C) and E)
G) All of the above

Question 13

Triangle Enterprises has no debt but can borrow at 9 percent. The firm's WACC is currently 14.7 percent, and there is no corporate tax. If the firm converts to 70 percent debt, what will its cost of equity be?

Accepted Answer

A)   20.67 percent
B)   22.95 percent
C)   24.47 percent
D)   26.39 percent
E)   28.00 percentF) B) and C)
G) B) and D)

Question 14

T.L.C. Enterprises just revised its capital structure from a debt-equity ratio of 0.30 to a debt-equity ratio of 0.45. The firm's shareholders who prefer the old capital structure should:

Accepted Answer

A)   sell some shares and hold the sale proceeds in cash.
B)   sell all of their shares and loan out the entire sale proceeds.
C)   do nothing.
D)   sell some shares and loan out the sale proceeds.
E)   borrow funds and purchase more shares.F) None of the above
G) C) and D)

Question 15

In the process of liquidation, some types of claims receive preference over other claims. Which one of the following determines which type of claim is paid first?

Accepted Answer

A)   Technical insolvency definition
B)   Absolute priority rule
C)   Accounting insolvency definition
D)   Chapter 7 of the Federal Bankruptcy Reform Act of 1978
E)   Securities and Exchange CommissionF) C) and D)
G) B) and E)

Question 16

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

Accepted Answer

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

Question 17

Which one of the following is minimized when the value of a firm is maximized?

Accepted Answer

A)   Return on equity
B)   WACC
C)   Debt
D)   Taxes
E)   Bankruptcy costsF) C) and E)
G) A) and D)

Question 18

Marcos & Sons has no debt. Its current total value is $58 million. What will the company's value be if it sells $21 million in debt and has a tax rate of 34 percent? Assume debt proceeds are used to repurchase equity.

Accepted Answer

A)   $58,220,000
B)   $60,370,000
C)   $62,330,000
D)   $64,560,000
E)   $65,140,000F) B) and E)
G) B) and C)

Question 19

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 percent and the tax rate is 34 percent. The company is in the process of issuing $6.2 million of 8.5 percent annual coupon bonds at par. What is the levered value of the firm?

Accepted Answer

A)   $5,278,164
B)   $5,541,085
C)   $6,422,225
D)   $6,713,185
E)   $7,385,695F) B) and C)
G) B) and D)

Question 20

Which one of the following is a key provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005?

Accepted Answer

A)   Disallowance of bankruptcy prepacks
B)   Right granted to creditors to file their own reorganization plan once a firm is in bankruptcy for 18 months
C)   Disallowance of all management bonus payments while a firm is in bankruptcy
D)   Requirement that only creditors can file reorganization plans for a bankrupt firm
E)   Requirement for all Chapter 11 bankruptcies to be converted to Chapter 7 bankruptcies after 18 monthsF) B) and E)
G) C) and D)

Exam 13: Leverage and Capital Structure

Correct Answer
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Which one of the following is minimized when the value of a firm is maximized?

Correct Answer
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Aaron's Tea House has a 32 percent tax rate and an interest tax shield valued at $6,728 for the year. How much did the firm pay in annual interest?

Correct Answer
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Correct Answer
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In the process of liquidation, some types of claims receive preference over other claims. Which one of the following determines which type of claim is paid first?

Correct Answer
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Correct Answer
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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?

Correct Answer
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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

Correct Answer
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T.L.C. Enterprises just revised its capital structure from a debt-equity ratio of 0.30 to a debt-equity ratio of 0.45. The firm's shareholders who prefer the old capital structure should:

Correct Answer
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Which one of the following is a key provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005?

Correct Answer
verified

Triangle Enterprises has no debt but can borrow at 9 percent. The firm's WACC is currently 14.7 percent, and there is no corporate tax. If the firm converts to 70 percent debt, what will its cost of equity be?

Correct Answer
verified

Tree Farms, Inc. currently has 45,000 shares of stock outstanding and no debt. The price per share is $17.50. The firm is considering borrowing funds at 7.5 percent interest and using the proceeds to repurchase 3,000 shares of stock. Ignore taxes. How much is the firm borrowing?

Correct Answer
verified

Marcos & Sons has no debt. Its current total value is $58 million. What will the company's value be if it sells $21 million in debt and has a tax rate of 34 percent? Assume debt proceeds are used to repurchase equity.

Correct Answer
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Correct Answer
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Correct Answer
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Snow Mountain Resort has a 33 percent tax rate. Its total interest payment for the year just ended was $6.8 million. What is the interest tax shield?

Correct Answer
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The static theory of capital structure assumes a firm:

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

Correct Answer
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A prepack:

Correct Answer
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Correct Answer
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Exam 13: Leverage and Capital Structure

Correct AnswerverifiedShow Answer

Which one of the following is minimized when the value of a firm is maximized?

Correct AnswerverifiedShow Answer

Aaron's Tea House has a 32 percent tax rate and an interest tax shield valued at $6,728 for the year. How much did the firm pay in annual interest?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

In the process of liquidation, some types of claims receive preference over other claims. Which one of the following determines which type of claim is paid first?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

T.L.C. Enterprises just revised its capital structure from a debt-equity ratio of 0.30 to a debt-equity ratio of 0.45. The firm's shareholders who prefer the old capital structure should:

Correct AnswerverifiedShow Answer

Which one of the following is a key provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005?

Correct AnswerverifiedShow Answer

Triangle Enterprises has no debt but can borrow at 9 percent. The firm's WACC is currently 14.7 percent, and there is no corporate tax. If the firm converts to 70 percent debt, what will its cost of equity be?

Correct AnswerverifiedShow Answer

Tree Farms, Inc. currently has 45,000 shares of stock outstanding and no debt. The price per share is $17.50. The firm is considering borrowing funds at 7.5 percent interest and using the proceeds to repurchase 3,000 shares of stock. Ignore taxes. How much is the firm borrowing?

Correct AnswerverifiedShow Answer

Marcos & Sons has no debt. Its current total value is $58 million. What will the company's value be if it sells $21 million in debt and has a tax rate of 34 percent? Assume debt proceeds are used to repurchase equity.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Snow Mountain Resort has a 33 percent tax rate. Its total interest payment for the year just ended was $6.8 million. What is the interest tax shield?

Correct AnswerverifiedShow Answer

The static theory of capital structure assumes a firm:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A prepack:

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Correct AnswerverifiedShow Answer

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