Your company doesn't face any taxes and has $5 million in assets, currently financed entirely with equity. Equity is worth $5 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: \[\begin{array} { c c c c } \text { State } & \text { pessmistic } & \text { optimistic } \\ \text { Probability of state } & 0.45 & 0.55 \\ \text { Expected EBIT in state } & \$ 2 \text { million } & \$ 8 \text { million } \end{array}\] The firm is considering switching to a 30 percent debt capital structure, and has determined that they would have to pay an 11 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $9.67 B) $7.33 C) $6.91 D) $4.84 A) $9.67 B) $7.33 C) $6.91 D) $4.84

HiLo, Inc., doesn't face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: \[\begin{array} { c c c } \text { State } & \text { Pessimistic } & \text { optimistic } & \\ \text { Probability of state } & 0.33 & 0.67 \\ \text { Expected EBIT in state } & \$ 8 \text { million } & \$ 15 \text { million } \end{array}\] The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) $7.91 B) $2.75 C) $6.59 D) $6.13 A) $7.91 B) $2.75 C) $6.59 D) $6.13

Daddi Mac, Inc., doesn't face any taxes and has $250 million in assets, currently financed entirely with equity. Equity is worth $13 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: \[\begin{array} { c c c c } \text { State } & \text { Recession } & \text { Average } & \text { Boom } \\ \text { Probability of state } & 0.25 & 0.55 & 0.20 \\ \text { Expected EBIT in state } & \$ 5 \text { million } & \$ 10 \text { million } & \$ 17 \text { million } \end{array}\] The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $0.13 B) $0.21 C) $0.27 D) $0.16 A) $0.13 B) $0.21 C) $0.27 D) $0.16

Your company faces a 21 percent tax rate and has $150 million in assets, currently financed entirely with equity. Equity is worth $8 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: \[\begin{array} { c c c } \text { State } & \text { Pessimistic } & \text { optimistic } & \\ \text { Probability of state } & 0.3 & 0.7 \\ \text { Expected EBIT in state } & \$ 15 \text { million } & \$ 40 \text { million } \end{array}\] The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 12 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $0.49 B) $1.08 C) $1.57 D) $1.69 A) $0.49 B) $1.08 C) $1.57 D) $1.69

Your company has a 21 percent tax rate and has $600 million in assets, currently financed entirely with equity. Equity is worth $20 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: \[\begin{array} { c c c c } \text { State } & \text { Recession } & \text { Average } & \text { Boom } \\ \text { Probability of state } & 0.05 & 0.70 & 0.25 \\ \text { Expected EBIT in state } & \$ 5 \text { million } & \$ 20 \text { million } & \$ 50 \text { million } \end{array}\] The firm is considering switching to a 30 percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $0.32 B) $0.14 C) $0.39 D) $0.95 A) $0.32 B) $0.14 C) $0.39 D) $0.95

HiLo, Inc., doesn't face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: \[\begin{array} { c c c } \text { State } & \text { Pessimistic } & \text { optimistic } & \\ \text { Probability of state } & 0.42 & 0.58 \\ \text { Expected EBIT in state } & \$ 5 \text { million } & \$ 15 \text { million } \end{array}\] The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) $4.12 B) $14.57 C) $15.82 D) $15.09 A) $4.12 B) $14.57 C) $15.82 D) $15.09

Your company faces a 21 percent tax rate and has $150 million in assets, currently financed entirely with equity. Equity is worth $8 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: \[\begin{array} { c c c } \text { State } & \text { Pessimistic } & \text { optimistic } & \\ \text { Probability of state } & 0.3 & 0.7 \\ \text { Expected EBIT in state } & \$ 15 \text { million } & \$ 40 \text { million } \end{array}\] The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 12 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) 0.289 B) 0.643 C) 0.798 D) 0.894 A) 0.289 B) 0.643 C) 0.798 D) 0.894

Your company faces a 21 percent tax rate and has $300 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: \[\begin{array} { c c c } \text { State } & \text { Pessimistic } & \text { optimistic } & \\ \text { Probability of state } & 0.4 & 0.6 \\ \text { Expected EBIT in state } & \$ 8 \text { million } & \$30 \text { million } \end{array}\] The firm is considering switching to a 30 percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) 0.123 B) 0.246 C) 0.406 D) 0.496 A) 0.123 B) 0.246 C) 0.406 D) 0.496

Your company doesn't face any taxes and has $200 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: \[\begin{array} { c c c } \text { State } & \text { Pessimistic } & \text { optimistic } & \\ \text { Probability of state } & 0.25 & 0.75 \\ \text { Expected EBIT in state } & \$ 5 \text { million } & \$ 25 \text { million } \end{array}\] The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay an 8 percent yield on perpetual debt in either event. What will be the break-even EBIT?

A) $13.6 million B) $15 million C) $16 million D) $20 million A) $13.6 million B) $15 million C) $16 million D) $20 million

Your company doesn't face any taxes and has $800 million in assets, currently financed entirely with equity. Equity is worth $60 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: \[\begin{array} { c c c c } \text { State } & \text { Recession } & \text { Average } & \text { Boorn } \\ \text { Probability of state } & 0.15 & 0.60 & 0.25 \\ \text { Expected EBIT in state } & \$ 20 \text { million } & \$ 50 \text { million } & \$ 100 \text { million } \end{array}\] The firm is considering switching to a 20 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) 2.47 B) 5.36 C) 6.12 D) 28.76 A) 2.47 B) 5.36 C) 6.12 D) 28.76

Exam 16: Assessing Long-Term Debt, Equity, and Capital Structure

Your company doesn't face any taxes and has $5 million in assets, currently financed entirely with equity. Equity is worth $5 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: State pessmistic optimistic Probability of state 0.45 0.55 Expected EBIT in state \ 2 million \ 8 million The firm is considering switching to a 30 percent debt capital structure, and has determined that they would have to pay an 11 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

(Multiple Choice)

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Question 81

Which of the following statements is correct?

(Multiple Choice)

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Question 82

The level of EBIT at which EPS will be equal for two different capital structures is known as:

(Multiple Choice)

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Question 83

An all-equity financed firm has $500 in assets and the stock price is $20. If the firm restructures with 15 percent debt which creates interest expense of $30 per year and the firm's tax rate is 21 percent, what is the break-even EBIT?

(Multiple Choice)

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Question 84

HiLo, Inc., doesn't face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: State Pessimistic optimistic Probability of state 0.33 0.67 Expected EBIT in state \ 8 million \ 15 million The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the standard deviation in EPS if they switch to the proposed capital structure?

(Multiple Choice)

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Question 85

In M&M's perfect world, their theorem's two main propositions are referred to as which of the following?

(Multiple Choice)

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Question 86

Daddi Mac, Inc., doesn't face any taxes and has $250 million in assets, currently financed entirely with equity. Equity is worth $13 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: State Recession Average Boom Probability of state 0.25 0.55 0.20 Expected EBIT in state \ 5 million \ 10 million \ 17 million The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the level of expected EPS if they switch to the proposed capital structure?

(Multiple Choice)

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Question 87

Your company faces a 21 percent tax rate and has $150 million in assets, currently financed entirely with equity. Equity is worth $8 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: State Pessimistic optimistic Probability of state 0.3 0.7 Expected EBIT in state \ 15 million \ 40 million The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 12 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

(Multiple Choice)

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Question 88

Your company has a 21 percent tax rate and has $600 million in assets, currently financed entirely with equity. Equity is worth $20 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: State Recession Average Boom Probability of state 0.05 0.70 0.25 Expected EBIT in state \ 5 million \ 20 million \ 50 million The firm is considering switching to a 30 percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

(Multiple Choice)

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Question 89

A firm faces a 21 percent tax rate and has $200m in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected EBIT is $10m. The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the firm's new ROE if they switch to the proposed capital structure?

(Multiple Choice)

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Question 90

Which of these is a situation that arises when a firm's equity is close to worthless, and equity holders will prefer to not invest in safe projects?

(Multiple Choice)

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Question 91

Suppose that a company's equity is currently selling for $45 per share and that there are 1 million shares outstanding. If the firm also has 7 thousand bonds outstanding, which are selling at 97 percent of par ($1,000), what are the firm's current capital structure weights for equity and debt respectively?

(Multiple Choice)

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Question 92

HiLo, Inc., doesn't face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: State Pessimistic optimistic Probability of state 0.42 0.58 Expected EBIT in state \ 5 million \ 15 million The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the standard deviation in EPS if they switch to the proposed capital structure?

(Multiple Choice)

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Question 93

Your company faces a 21 percent tax rate and has $150 million in assets, currently financed entirely with equity. Equity is worth $8 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: State Pessimistic optimistic Probability of state 0.3 0.7 Expected EBIT in state \ 15 million \ 40 million The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 12 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

(Multiple Choice)

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Question 94

JJJ Corp. has $10 million in assets and is currently financed with 100 percent equity. The firm decides to switch to a 60 percent equity/40 percent debt structure and decides to fund the next $4 million of assets for future projects entirely with debt, resulting in the desired capital structure at some point in the future. This is an example of:

(Multiple Choice)

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Question 95

What causes the change in optimal strategy when taxes are added back to the M&M theorem?

(Multiple Choice)

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Question 96

Your company faces a 21 percent tax rate and has $300 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: State Pessimistic optimistic Probability of state 0.4 0.6 Expected EBIT in state \ 8 million \3 0 million The firm is considering switching to a 30 percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

(Multiple Choice)

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Question 97

Your company doesn't face any taxes and has $200 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: State Pessimistic optimistic Probability of state 0.25 0.75 Expected EBIT in state \ 5 million \ 25 million The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay an 8 percent yield on perpetual debt in either event. What will be the break-even EBIT?

(Multiple Choice)

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Question 98

Your company doesn't face any taxes and has $800 million in assets, currently financed entirely with equity. Equity is worth $60 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows: State Recession Average Boorn Probability of state 0.15 0.60 0.25 Expected EBIT in state \ 20 million \ 50 million \ 100 million The firm is considering switching to a 20 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

(Multiple Choice)

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Question 99

The policy of changing the capital structure gradually over time by funding new capital projects disproportionately with the type of capital you want to increase in the capital structure is referred to as:

(Multiple Choice)

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Question 100

Showing 81 - 100 of 114

Which of the following statements is correct?

The level of EBIT at which EPS will be equal for two different capital structures is known as:

An all-equity financed firm has $500 in assets and the stock price is $20. If the firm restructures with 15 percent debt which creates interest expense of $30 per year and the firm's tax rate is 21 percent, what is the break-even EBIT?

In M&M's perfect world, their theorem's two main propositions are referred to as which of the following?

Which of these is a situation that arises when a firm's equity is close to worthless, and equity holders will prefer to not invest in safe projects?

What causes the change in optimal strategy when taxes are added back to the M&M theorem?

The policy of changing the capital structure gradually over time by funding new capital projects disproportionately with the type of capital you want to increase in the capital structure is referred to as:

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

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