Question 1

Lyme Home has 3,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 8%. The interest is paid semi-annually. What is the amount of the annual interest tax shield if the tax rate is 30%?

Accepted Answer

A)   $52,000
B)   $60,000
C)   $62,500
D)   $68,000
E)   $72,000F) C) and D)
G) A) and B)

Question 2

MM 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)   it is completely irrelevant how a firm arranges its finances.
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)   financial risk is determined by the debt-equity ratio.F) D) and E)
G) B) and D)

Question 3

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

Accepted Answer

A)   the firm's value is minimized.
B)   the firm's value is maximized.
C)   the firm's bondholders are made well off.
D)   the firms suppliers of raw materials are satisfied.
E)   the firms dividend payout is maximized.F) A) and B)
G) B) and E)

Question 4

Bigelow,Inc. has a cost of equity of 13.56% and a pre-tax cost of debt of 7%. The required return on the assets is 11%. What is the firm's debt-equity ratio based on MM Proposition II with no taxes?

Accepted Answer

A)   .60
B)   .64
C)   .72
D)   .75
E)   .80F) A) and D)
G) B) and C)

Question 5

You own 30% of Westcoast,Inc. You have decided to retire and want to sell your shares in this closely held,all equity firm. The other shareholders have agreed to have the firm borrow $2 million to purchase your 2,000 shares of stock. What is the total value of this firm today if you ignore taxes?

Accepted Answer

A)   $4.58 million
B)   $5.08 million
C)   $5.40 million
D)   $5.76 million
E)   $6.67 millionF) B) and D)
G) B) and E)

Question 6

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 the 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 these.F) None of the above
G) D) and E)

Question 7

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 these.F) All of the above
G) D) and E)

Question 8

Your firm has a debt-equity ratio of .60. Your pre-tax cost of debt is 6.0% and your required return on assets is 12%. What is your cost of equity if you ignore taxes?

Accepted Answer

A)   9.00%
B)   12.00%
C)   14.50%
D)   15.60%
E)   16.10%F) A) and D)
G) A) and C)

Question 9

Aspen's Distributors has 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%F) D) and E)
G) A) and C)

Question 10

Reena Industries has $10,000 of debt outstanding that is selling at par and has a coupon rate of 7%. The tax rate is 34%. What is the present value of the tax shield?

Accepted Answer

A)   $2,800
B)   $3,000
C)   $3,400
D)   $3,800
E)   $7.000F) A) and C)
G) A) and E)

Question 11

Thompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding. The company is in the process of borrowing $8 million at 9% interest to repurchase 200,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes?

Accepted Answer

A)   $20.0 million
B)   $20.8 million
C)   $21.0 million
D)   $21.2 million
E)   $21.3 millionF) All of the above
G) B) and D)

Question 12

Consider two firms,U and L,both with $50,000 in assets. Firm U is unlevered,and firm L has $20,000 of debt that pays 8% interest. Firm U has 1,000 shares outstanding,while firm L has 600 shares outstanding. Mike owns 20% of firm L and believes that leverage works in his favor. Steve tells Mike that this is an illusion,and that with the possibility of borrowing on his own account at 8% interest,he can replicate Mike's payout from firm L.
Given a level of operating income of $2,500,show the specific strategy that Mike has in mind.

Accepted Answer

Mike is entitled to .2 ($2,500 - $1,600)...

Question 13

The concept of homemade leverage is most associated with:

Accepted Answer

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

Question 14

Bryan invested in Bryco,Inc. 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:

Accepted Answer

A)   borrow some money and purchase additional shares of Bryco stock.
B)   maintain his current position as the debt of the firm did not affect his personal leverage position.
C)   sell some shares of Bryco stock and hold the proceeds in cash.
D)   sell some shares of Bryco stock and loan it out such that he creates a personal debt-equity ratio equal to that of the firm.
E)   create a personal debt-equity ratio that is equal to exactly 50% of the debt-equity ratio of the firm.F) A) and D)
G) A) and E)

Question 15

A firm has a debt-to-equity ratio of .60. Its cost of debt is 8%. Its overall cost of capital is 12%. What is its cost of equity if there are no taxes or other imperfections?

Accepted Answer

A)   10.0%
B)   13.5%
C)   14.4%
D)   18.0%
E)   None of these.F) A) and E)
G) None of the above

Question 16

The change in firm value in the presence of corporate taxes only is:

Accepted Answer

A)   positive as equityholders face a lower effective tax rate.
B)   positive as equityholders gain the tax shield on the debt interest.
C)   negative because of the increased risk of default and fewer shares outstanding.
D)   negative because of a reduction of equity outstanding.
E)   None of these.F) C) and D)
G) A) and E)

Question 17

A firm has zero debt in its capital structure. Its overall cost of capital is 9%. The firm is considering a new capital structure with 40% debt. The interest rate on the debt would be 4%. Assuming that the corporate tax rate is 34%,what would the cost of equity capital with the new capital structure be?

Accepted Answer

A)   10.3%
B)   11.0%
C)   11.2%
D)   13.9%
E)   None of these.F) A) and E)
G) C) and D)

Question 18

Juanita's Steak House has $12,000 of debt outstanding that is selling at par and has a coupon rate of 8%. The tax rate is 34%. What is the present value of the tax shield?

Accepted Answer

A)   $2,823
B)   $2,887
C)   $4,080
D)   $4,500
E)   $4,633F) C) and E)
G) D) and E)

Question 19

What is the cost of equity for a firm if the corporate tax rate is 40%? The firm has a debt-to-equity ratio of 1.5. If it had no debt,its cost of equity would be 16%. Its current cost of debt is 10%.

Accepted Answer

A)   17.4%
B)   18.4%
C)   19.6%
D)   21.4%
E)   None of these.F) A) and B)
G) A) and C)

Question 20

A firm has debt of $7,000,equity of $12,000,a leveraged value of $8,900,a cost of debt of 7%,a cost of equity of 14%,and a tax rate of 30%. What is the firm's weighted average cost of capital?

Accepted Answer

A)   8.45%
B)   9.90%
C)   10.65%
D)   12.50%
E)   14.00%F) B) and E)
G) B) and D)

Exam 16: Capital Structure: Basic Concepts

Reena Industries has $10,000 of debt outstanding that is selling at par and has a coupon rate of 7%. The tax rate is 34%. What is the present value of the tax shield?

Correct Answer
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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 the cost of equity be if the debt-to-equity ratio were 0?

Correct Answer
verified

Bigelow,Inc. has a cost of equity of 13.56% and a pre-tax cost of debt of 7%. The required return on the assets is 11%. What is the firm's debt-equity ratio based on MM Proposition II with no taxes?

Correct Answer
verified

Bryan invested in Bryco,Inc. 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:

Correct Answer
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Lyme Home has 3,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 8%. The interest is paid semi-annually. What is the amount of the annual interest tax shield if the tax rate is 30%?

Correct Answer
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Correct Answer
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Mike is entitled to .2 ($2,500 - $1,600)...
View Answer

Juanita's Steak House has $12,000 of debt outstanding that is selling at par and has a coupon rate of 8%. The tax rate is 34%. What is the present value of the tax shield?

Correct Answer
verified

The change in firm value in the presence of corporate taxes only is:

Correct Answer
verified

Thompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding. The company is in the process of borrowing $8 million at 9% interest to repurchase 200,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes?

Correct Answer
verified

Correct Answer
verified

Your firm has a debt-equity ratio of .60. Your pre-tax cost of debt is 6.0% and your required return on assets is 12%. What is your cost of equity if you ignore taxes?

Correct Answer
verified

A firm has a debt-to-equity ratio of .60. Its cost of debt is 8%. Its overall cost of capital is 12%. What is its cost of equity if there are no taxes or other imperfections?

Correct Answer
verified

You own 30% of Westcoast,Inc. You have decided to retire and want to sell your shares in this closely held,all equity firm. The other shareholders have agreed to have the firm borrow $2 million to purchase your 2,000 shares of stock. What is the total value of this firm today if you ignore taxes?

Correct Answer
verified

Aspen's Distributors has 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?

Correct Answer
verified

MM Proposition I with no tax supports the argument that:

Correct Answer
verified

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

Correct Answer
verified

What is the cost of equity for a firm if the corporate tax rate is 40%? The firm has a debt-to-equity ratio of 1.5. If it had no debt,its cost of equity would be 16%. Its current cost of debt is 10%.

Correct Answer
verified

A firm has debt of $7,000,equity of $12,000,a leveraged value of $8,900,a cost of debt of 7%,a cost of equity of 14%,and a tax rate of 30%. What is the firm's weighted average cost of capital?

Correct Answer
verified

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%?

Correct Answer
verified

The concept of homemade leverage is most associated with:

Correct Answer
verified

Exam 16: Capital Structure: Basic Concepts

Reena Industries has $10,000 of debt outstanding that is selling at par and has a coupon rate of 7%. The tax rate is 34%. What is the present value of the tax shield?

Correct AnswerverifiedShow Answer

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 the cost of equity be if the debt-to-equity ratio were 0?

Correct AnswerverifiedShow Answer

Bigelow,Inc. has a cost of equity of 13.56% and a pre-tax cost of debt of 7%. The required return on the assets is 11%. What is the firm's debt-equity ratio based on MM Proposition II with no taxes?

Correct AnswerverifiedShow Answer

Bryan invested in Bryco,Inc. 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:

Correct AnswerverifiedShow Answer

Lyme Home has 3,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 8%. The interest is paid semi-annually. What is the amount of the annual interest tax shield if the tax rate is 30%?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedMike is entitled to .2 ($2,500 - $1,600)...View AnswerShow Answer

Juanita's Steak House has $12,000 of debt outstanding that is selling at par and has a coupon rate of 8%. The tax rate is 34%. What is the present value of the tax shield?

Correct AnswerverifiedShow Answer

The change in firm value in the presence of corporate taxes only is:

Correct AnswerverifiedShow Answer

Thompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding. The company is in the process of borrowing $8 million at 9% interest to repurchase 200,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Your firm has a debt-equity ratio of .60. Your pre-tax cost of debt is 6.0% and your required return on assets is 12%. What is your cost of equity if you ignore taxes?

Correct AnswerverifiedShow Answer

A firm has a debt-to-equity ratio of .60. Its cost of debt is 8%. Its overall cost of capital is 12%. What is its cost of equity if there are no taxes or other imperfections?

Correct AnswerverifiedShow Answer

You own 30% of Westcoast,Inc. You have decided to retire and want to sell your shares in this closely held,all equity firm. The other shareholders have agreed to have the firm borrow $2 million to purchase your 2,000 shares of stock. What is the total value of this firm today if you ignore taxes?

Correct AnswerverifiedShow Answer

Aspen's Distributors has 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?

Correct AnswerverifiedShow Answer

MM Proposition I with no tax supports the argument that:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

What is the cost of equity for a firm if the corporate tax rate is 40%? The firm has a debt-to-equity ratio of 1.5. If it had no debt,its cost of equity would be 16%. Its current cost of debt is 10%.

Correct AnswerverifiedShow Answer

A firm has debt of $7,000,equity of $12,000,a leveraged value of $8,900,a cost of debt of 7%,a cost of equity of 14%,and a tax rate of 30%. What is the firm's weighted average cost of capital?

Correct AnswerverifiedShow Answer

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%?

Correct AnswerverifiedShow Answer

The concept of homemade leverage is most associated with:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Mike is entitled to .2 ($2,500 - $1,600)...
View Answer

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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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