Question 1

According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

Accepted Answer

A) True 
 B)False

Question 2

When a firm has risky debt, its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the equity.

Accepted Answer

A) True 
 B)False

Question 3

The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
-What is the value of the firm according to MM with corporate taxes?

Accepted Answer

A)  $475,875 
B)  $528,750 
C)  $587,500 
D)  $646,250 
E)  $710,875 
A)  $475,875 
B)  $528,750 
C)  $587,500 
D)  $646,250 
E)  $710,875

Question 4

In the MM extension with growth, the appropriate discount rate for the tax shield is the unlevered cost of equity.

Accepted Answer

A) True 
 B)False

Question 5

The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
-What is the firm's cost of equity?

Accepted Answer

A)  21.0% 
B)  23.3% 
C)  25.9% 
D)  28.8% 
E)  32.0% 
A)  21.0% 
B)  23.3% 
C)  25.9% 
D)  28.8% 
E)  32.0%

Question 6

In the MM extension with growth, the appropriate discount rate for the tax shield is the WACC.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Accepted Answer

A)  The tax shields should be discounted at the unlevered cost of equity. 
B)  The value of a growing tax shield is greater than the value of a constant tax shield. 
C)  For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions. 
D)  For a given D/S, the WACC is less than the WACC under MM's original (with tax) assumptions. 
E)  The total value of the firm increases with the amount of debt. 
A)  The tax shields should be discounted at the unlevered cost of equity. 
B)  The value of a growing tax shield is greater than the value of a constant tax shield. 
C)  For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions. 
D)  For a given D/S, the WACC is less than the WACC under MM's original (with tax) assumptions. 
E)  The total value of the firm increases with the amount of debt.

Question 8

The Miller model begins with the MM model with taxes and then adds personal taxes.

Accepted Answer

A) True 
 B)False

Question 9

MM showed that in a world without taxes, a firm's value is not affected by its capital structure.

Accepted Answer

A) True 
 B)False

Question 10

The MM model is the same as the Miller model, but with zero corporate taxes.

Accepted Answer

A) True 
 B)False

Question 11

Your firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is the value of your firm's tax shield, i.e., how much value does the use of debt add?

Accepted Answer

A)  $92,571 
B)  $102,857 
C)  $113,143 
D)  $124,457 
E)  $136,903 
A)  $92,571 
B)  $102,857 
C)  $113,143 
D)  $124,457 
E)  $136,903

According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

When a firm has risky debt, its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the equity.

The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. -What is the value of the firm according to MM with corporate taxes?

In the MM extension with growth, the appropriate discount rate for the tax shield is the unlevered cost of equity.

The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. -What is the firm's cost of equity?

In the MM extension with growth, the appropriate discount rate for the tax shield is the WACC.

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

The Miller model begins with the MM model with taxes and then adds personal taxes.

MM showed that in a world without taxes, a firm's value is not affected by its capital structure.

The MM model is the same as the Miller model, but with zero corporate taxes.

An Overview of Financial Management

Risk and Return: Part I

Risk and Return: Part II

Bond Valuation

Basic Stock Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Financial Planning and Forecasting Financial Statements

Determining the Cost of Capital

Corporate Valuation and Value-Based Management

Capital Budgeting: Decision Criteria

Capital Budgeting: Cash Flows and Risk

Real Options

Capital Structure Decisions: Part I

Distributions to Shareholders

Ipos, Investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing

Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Derivatives and Risk Management

Bankruptcy, Reorganization, and Liquidation

Mergers, Lbos, Divestitures, and Holding Companies

Multinational Financial Management

Filters

Exam 16: Capital Structure Decisions: Part II

According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

When a firm has risky debt, its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the equity.

The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. -What is the value of the firm according to MM with corporate taxes?

In the MM extension with growth, the appropriate discount rate for the tax shield is the unlevered cost of equity.

The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. -What is the firm's cost of equity?

In the MM extension with growth, the appropriate discount rate for the tax shield is the WACC.

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

The Miller model begins with the MM model with taxes and then adds personal taxes.

MM showed that in a world without taxes, a firm's value is not affected by its capital structure.

The MM model is the same as the Miller model, but with zero corporate taxes.

An Overview of Financial Management

Risk and Return: Part I

Risk and Return: Part II

Bond Valuation

Basic Stock Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Financial Planning and Forecasting Financial Statements

Determining the Cost of Capital

Corporate Valuation and Value-Based Management

Capital Budgeting: Decision Criteria

Capital Budgeting: Cash Flows and Risk

Real Options

Capital Structure Decisions: Part I

Distributions to Shareholders

Ipos, Investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing

Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Derivatives and Risk Management

Bankruptcy, Reorganization, and Liquidation

Mergers, Lbos, Divestitures, and Holding Companies

Multinational Financial Management

Filters