Question 1

The Pizza Palace has a cost of equity of 15.3 percent and an unlevered cost of capital of 11.8 percent.The company has $22,000 in debt that is selling at par value.The levered value of the firm is $41,000 and the tax rate is 34 percent.What is the pre-tax cost of debt?

Accepted Answer

A)  4.73 percent
B)  6.18 percent
C)  6.59 percent
D)  7.22 percent
E)  9.92 percentF) A) and D)
G) A) and E)

Question 2

Which one of the following statements related to Chapter 7 bankruptcy is correct?

Accepted Answer

A)  A firm in Chapter 7 bankruptcy is reorganizing its operations such that it can return to being a viable concern.
B)  Under a Chapter 7 bankruptcy, a trustee will assume control of the firm's assets until those assets can be liquidated.
C)  Chapter 7 bankruptcies are always involuntary on the part of the firm.
D)  Under a Chapter 7 bankruptcy, the claims of creditors are paid prior to the administrative costs of the bankruptcy.
E)  Chapter 7 bankruptcy allows a firm to restructure its equity such that new shares of stock are generally issued prior to the firm coming out of bankruptcy.F) A) and E)
G) A) and D)

Question 3

Bright Morning Foods has expected earnings before interest and taxes of $48,600,an unlevered cost of capital of 13.2 percent,and debt with both a book and face value of $25,000.The debt has an 8.5 percent coupon.The tax rate is 34 percent.What is the value of the firm?

Accepted Answer

A)  $245,500
B)  $247,600
C)  $251,500
D)  $264,800
E)  $271,300F) B) and C)
G) C) and D)

Question 4

The optimal capital structure has been achieved when the:

Accepted Answer

A)  debt-equity ratio is equal to 1.
B)  weight of equity is equal to the weight of debt.
C)  cost of equity is maximized given a pre-tax cost of debt.
D)  debt-equity ratio is such that the cost of debt exceeds the cost of equity.
E)  debt-equity ratio results in the lowest possible weighted average cost of capital.F) A) and C)
G) D) and E)

Question 5

The proposition that a firm borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs is called:

Accepted Answer

A)  the static theory of capital structure.
B)  M & M Proposition I.
C)  M & M Proposition II.
D)  the capital asset pricing model.
E)  the open markets theorem.F) A) and B)
G) B) and E)

Question 6

M & M Proposition II is the proposition that:

Accepted Answer

A)  the capital structure of a firm has no effect on the firm's value.
B)  the cost of equity depends on the return on debt, the debt-equity ratio, and the tax rate.
C)  a firm's cost of equity is a linear function with a slope equal to (RA - R
D)  .
D)  the cost of equity is equivalent to the required rate of return on a firm's assets.
E)  the size of the pie does not depend on how the pie is sliced.F) A) and C)
G) D) and E)

Question 7

A business firm ceases to exist as a going concern as a result of which one of the following?

Accepted Answer

A)  divestiture
B)  share repurchase
C)  liquidation
D)  reorganization
E)  capital restructuringF) A) and E)
G) B) and D)

Question 8

New Schools,Inc.expects an EBIT of $7,000 every year forever.The firm currently has no debt,and its cost of equity is 15 percent.The firm can borrow at 8 percent and the corporate tax rate is 34 percent.What will the value of the firm be if it converts to 50 percent debt?

Accepted Answer

A)  $31,796.47
B)  $36,036.00
C)  $37,407.16
D)  $37,552.08
E)  $38,119.30F) None of the above
G) All of the above

Question 9

The value of a firm is maximized when the:

Accepted Answer

A)  cost of equity is maximized.
B)  tax rate is zero.
C)  levered cost of capital is maximized.
D)  weighted average cost of capital is minimized.
E)  debt-equity ratio is minimized.F) A) and B)
G) A) and C)

Question 10

D.L.Tuckers has $21,000 of debt outstanding that is selling at par and has a coupon rate of 7.5 percent.The tax rate is 32 percent.What is the present value of the tax shield?

Accepted Answer

A)  $504
B)  $615
C)  $644
D)  $6,200
E)  $6,720F) C) and D)
G) A) and E)

Question 11

Which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? Assume there are no taxes.

Accepted Answer

A)  At the break-even point, there is no advantage to debt.
B)  The earnings per share will equal zero when EBIT is zero for a levered firm.
C)  The advantages of leverage are inversely related to the level of EBIT.
D)  The use of leverage at any level of EBIT increases the EPS.
E)  EPS are more sensitive to changes in EBIT when a firm is unlevered.F) D) and E)
G) A) and D)

Question 12

Young's Home Supply has a debt-equity ratio of 0.80.The cost of equity is 14.5 percent and the aftertax cost of debt is 4.9 percent.What will the firm's cost of equity be if the debt-equity ratio is revised to 0.70?

Accepted Answer

A)  10.89 percent
B)  11.47 percent
C)  11.70 percent
D)  13.89 percent
E)  13.97 percentF) A) and B)
G) A) and C)

Question 13

M & M Proposition I with no tax supports the argument that:

Accepted Answer

A)  business risk determines the return on assets.
B)  the cost of equity rises as leverage rises.
C)  the debt-equity ratio of a firm is completely irrelevant.
D)  a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.
E)  homemade leverage is irrelevant.F) A) and B)
G) C) and D)

Question 14

The optimal capital structure:

Accepted Answer

A)  will be the same for all firms in the same industry.
B)  will remain constant over time unless the firm changes its primary operations.
C)  will vary over time as taxes and market conditions change.
D)  places more emphasis on operations than on financing.
E)  is unaffected by changes in the financial markets.F) A) and E)
G) A) and D)

Question 15

The Jean Outlet is an all equity firm that has 146,000 shares of stock outstanding.The company has decided to borrow the $1.1 million to repurchase 7,500 shares of its stock from the estate of a deceased shareholder.What is the total value of the firm if you ignore taxes?

Accepted Answer

A)  $18,387,702
B)  $18,500,000
C)  $19,666,667
D)  $21,413,333
E)  $22,293,333F) A) and C)
G) A) and B)

Question 16

Percy's Wholesale Supply has earnings before interest and taxes of $106,000.Both the book and the market value of debt is $170,000.The unlevered cost of equity is 15.5 percent while the pre-tax cost of debt is 8.6 percent.The tax rate is 38 percent.What is the firm's weighted average cost of capital?

Accepted Answer

A)  11.94 percent
B)  12.65 percent
C)  13.45 percent
D)  14.01 percent
E)  14.37 percentF) A) and D)
G) A) and E)

Question 17

Which one of the following states that the value of a firm is unrelated to the firm's capital structure?

Accepted Answer

A)  Capital Asset Pricing Model
B)  M & M Proposition I
C)  M & M Proposition II
D)  Law of One Price
E)  Efficient Markets HypothesisF) C) and D)
G) A) and C)

Question 18

You currently own 600 shares of JKL,Inc.JKL is an all equity firm that has 75,000 shares of stock outstanding at a market price of $40 a share.The company's earnings before interest and taxes are $140,000.JKL has decided to issue $1 million of debt at 8 percent interest.This debt will be used to repurchase shares of stock.How many shares of JKL stock must you sell to unlever your position if you can loan out funds at 8 percent interest?

Accepted Answer

A)  120 shares
B)  150 shares
C)  180 shares
D)  200 shares
E)  250 sharesF) All of the above
G) None of the above

Question 19

Which of the following statements related to financial risk are correct?
I.Financial risk is the risk associated with the use of debt financing.
II.As financial risk increases so too does the cost of equity.
III.Financial risk is wholly dependent upon the financial policy of a firm.
IV.Financial risk is the risk that is inherent in a firm's operations.

Accepted Answer

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

Question 20

The business risk of a firm:

Accepted Answer

A)  depends on the firm's level of unsystematic risk.
B)  is inversely related to the required return on the firm's assets.
C)  is dependent upon the relative weights of the debt and equity used to finance the firm.
D)  has a positive relationship with the firm's cost of equity.
E)  has no relationship with the required return on a firm's assets according to M & M Proposition II.F) B) and C)
G) A) and D)

Exam 16: Financial Leverage and Capital Structure Policy

New Schools,Inc.expects an EBIT of $7,000 every year forever.The firm currently has no debt,and its cost of equity is 15 percent.The firm can borrow at 8 percent and the corporate tax rate is 34 percent.What will the value of the firm be if it converts to 50 percent debt?

Correct Answer
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The optimal capital structure has been achieved when the:

Correct Answer
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The value of a firm is maximized when the:

Correct Answer
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Which one of the following statements related to Chapter 7 bankruptcy is correct?

Correct Answer
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Which one of the following states that the value of a firm is unrelated to the firm's capital structure?

Correct Answer
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M & M Proposition II is the proposition that:

Correct Answer
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Young's Home Supply has a debt-equity ratio of 0.80.The cost of equity is 14.5 percent and the aftertax cost of debt is 4.9 percent.What will the firm's cost of equity be if the debt-equity ratio is revised to 0.70?

Correct Answer
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The Pizza Palace has a cost of equity of 15.3 percent and an unlevered cost of capital of 11.8 percent.The company has $22,000 in debt that is selling at par value.The levered value of the firm is $41,000 and the tax rate is 34 percent.What is the pre-tax cost of debt?

Correct Answer
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The business risk of a firm:

Correct Answer
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The Jean Outlet is an all equity firm that has 146,000 shares of stock outstanding.The company has decided to borrow the $1.1 million to repurchase 7,500 shares of its stock from the estate of a deceased shareholder.What is the total value of the firm if you ignore taxes?

Correct Answer
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Which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? Assume there are no taxes.

Correct Answer
verified

D.L.Tuckers has $21,000 of debt outstanding that is selling at par and has a coupon rate of 7.5 percent.The tax rate is 32 percent.What is the present value of the tax shield?

Correct Answer
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Correct Answer
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Correct Answer
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The optimal capital structure:

Correct Answer
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Correct Answer
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The proposition that a firm borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs is called:

Correct Answer
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M & M Proposition I with no tax supports the argument that:

Correct Answer
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A business firm ceases to exist as a going concern as a result of which one of the following?

Correct Answer
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Bright Morning Foods has expected earnings before interest and taxes of $48,600,an unlevered cost of capital of 13.2 percent,and debt with both a book and face value of $25,000.The debt has an 8.5 percent coupon.The tax rate is 34 percent.What is the value of the firm?

Correct Answer
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Exam 16: Financial Leverage and Capital Structure Policy

New Schools,Inc.expects an EBIT of $7,000 every year forever.The firm currently has no debt,and its cost of equity is 15 percent.The firm can borrow at 8 percent and the corporate tax rate is 34 percent.What will the value of the firm be if it converts to 50 percent debt?

Correct AnswerverifiedShow Answer

The optimal capital structure has been achieved when the:

Correct AnswerverifiedShow Answer

The value of a firm is maximized when the:

Correct AnswerverifiedShow Answer

Which one of the following statements related to Chapter 7 bankruptcy is correct?

Correct AnswerverifiedShow Answer

Which one of the following states that the value of a firm is unrelated to the firm's capital structure?

Correct AnswerverifiedShow Answer

M & M Proposition II is the proposition that:

Correct AnswerverifiedShow Answer

Young's Home Supply has a debt-equity ratio of 0.80.The cost of equity is 14.5 percent and the aftertax cost of debt is 4.9 percent.What will the firm's cost of equity be if the debt-equity ratio is revised to 0.70?

Correct AnswerverifiedShow Answer

The Pizza Palace has a cost of equity of 15.3 percent and an unlevered cost of capital of 11.8 percent.The company has $22,000 in debt that is selling at par value.The levered value of the firm is $41,000 and the tax rate is 34 percent.What is the pre-tax cost of debt?

Correct AnswerverifiedShow Answer

The business risk of a firm:

Correct AnswerverifiedShow Answer

The Jean Outlet is an all equity firm that has 146,000 shares of stock outstanding.The company has decided to borrow the $1.1 million to repurchase 7,500 shares of its stock from the estate of a deceased shareholder.What is the total value of the firm if you ignore taxes?

Correct AnswerverifiedShow Answer

Which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? Assume there are no taxes.

Correct AnswerverifiedShow Answer

D.L.Tuckers has $21,000 of debt outstanding that is selling at par and has a coupon rate of 7.5 percent.The tax rate is 32 percent.What is the present value of the tax shield?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The optimal capital structure:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The proposition that a firm borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs is called:

Correct AnswerverifiedShow Answer

M & M Proposition I with no tax supports the argument that:

Correct AnswerverifiedShow Answer

A business firm ceases to exist as a going concern as a result of which one of the following?

Correct AnswerverifiedShow Answer

Bright Morning Foods has expected earnings before interest and taxes of $48,600,an unlevered cost of capital of 13.2 percent,and debt with both a book and face value of $25,000.The debt has an 8.5 percent coupon.The tax rate is 34 percent.What is the value of the firm?

Correct AnswerverifiedShow Answer

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