Question 1

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

Accepted Answer

A) True 
 B)False  True

Question 2

the MM extension with growth, the appropriate discount rate for the tax shield is the after-tax cost of debt.

Accepted Answer

A) True 
 B)False  False

Question 3

The total value (debt plus equity) of Wilson Dover Inc. is $500 million and the face value of its 1-year coupon debt is $200 million. The volatility () of Wilson DOver's total value is 0.60, and the risk-free rate is 5%. Assume that N(d1) = 0.9720 and N(d2) = 0.9050.
-is the yield on Wilson Dover's debt?

Accepted Answer

A)  6.04% 
B)  6.36% 
C)  6.70% 
D)  7.05% 
E)  7.42% 
A)  6.04% 
B)  6.36% 
C)  6.70% 
D)  7.05% 
E)  7.42% E

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 6

market value of Firm L's debt is $200,000 and its yield is 9% The firm's equity has a market value of $300,000, its earnings are 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 would Firm L's total value be if it had no debt?

Accepted Answer

A)  $358,421 
B)  $377,286 
C)  $397,143 
D)  $417,000 
E)  $437,850 
A)  $358,421 
B)  $377,286 
C)  $397,143 
D)  $417,000 
E)  $437,850

Question 7

major contribution of the Miller model is that it demonstrates that

Accepted Answer

A)  personal taxes decrease the value of using corporate debt. 
B)  financial distress and agency costs reduce the value of using corporate debt. 
C)  equity costs increase with financial leverage. 
D)  debt costs increase with financial leverage. 
E)  personal taxes increase the value of using corporate debt. 
A)  personal taxes decrease the value of using corporate debt. 
B)  financial distress and agency costs reduce the value of using corporate debt. 
C)  equity costs increase with financial leverage. 
D)  debt costs increase with financial leverage. 
E)  personal taxes increase the value of using corporate debt.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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 10

Miller model begins with the MM model without corporate taxes and then adds personal taxes.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

According to the MM extension with growth, what is Kitto's value of equity?

Accepted Answer

A)  $1,492,000 
B)  $1,529,300 
C)  $1,567,533 
D)  $1,606,721 
E)  $1,646,889 
A)  $1,492,000 
B)  $1,529,300 
C)  $1,567,533 
D)  $1,606,721 
E)  $1,646,889

Question 13

a world with no taxes, MM show that a firm's capital structure does not affect the firm's value However, when taxes are considered, MM show a positive relationship between debt and value, i.e., its value rises as its debt is increased.

Accepted Answer

A) True 
 B)False

Question 14

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 15

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

Accepted Answer

A) True 
 B)False

Question 16

The total value (debt plus equity) of Wilson Dover Inc. is $500 million and the face value of its 1-year coupon debt is $200 million. The volatility () of Wilson DOver's total value is 0.60, and the risk-free rate is 5%. Assume that N(d1) = 0.9720 and N(d2) = 0.9050.
-is the value (in millions) of Wilson Dover's equity if it is viewed as an option?

Accepted Answer

A)  $228.77 
B)  $254.19 
C)  $282.43 
D)  $313.81 
E)  $345.19 
A)  $228.77 
B)  $254.19 
C)  $282.43 
D)  $313.81 
E)  $345.19

Question 17

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

Accepted Answer

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

Question 18

Which of the following statements concerning capital structure theory is NOT CORRECT?

Accepted Answer

A)  Under MM with zero taxes, financial leverage has no effect on a firm's value. 
B)  Under MM with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt. 
C)  Under MM with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing. 
D)  Under MM with corporate taxes, the effect of business risk is automatically incorporated because rsL is a function of rsU. 
E)  The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt. 
A)  Under MM with zero taxes, financial leverage has no effect on a firm's value. 
B)  Under MM with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt. 
C)  Under MM with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing. 
D)  Under MM with corporate taxes, the effect of business risk is automatically incorporated because rsL is a function of rsU. 
E)  The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt.

Question 19

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

Accepted Answer

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

Question 20

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

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

the MM extension with growth, the appropriate discount rate for the tax shield is the after-tax cost of debt.

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

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

major contribution of the Miller model is that it demonstrates that

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

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

Miller model begins with the MM model without corporate taxes and then adds personal taxes.

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

According to the MM extension with growth, what is Kitto's value of equity?

a world with no taxes, MM show that a firm's capital structure does not affect the firm's value However, when taxes are considered, MM show a positive relationship between debt and value, i.e., its value rises as its debt is increased.

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

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

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

Which of the following statements concerning capital structure theory is NOT CORRECT?

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

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.

Overview

Risk and Return: Part I

Risk and Return: Part II

Bonds

Stocks

Financial Options

Financial Analysis

Forecasting

Cost of Capital

Corporate Valuation

Capital Budgeting

Cash Flows and Risk

Real Options

Cap Structure

Dividends

Ipos, Invsmt Banking

Leasing

Hybrids

Working Capital

Derivatives

Bankruptcy, Reorganization, and Liquidation

Mergers

Filters

Exam 16: Cap Structure II

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

the MM extension with growth, the appropriate discount rate for the tax shield is the after-tax cost of debt.

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

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

major contribution of the Miller model is that it demonstrates that

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

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

Miller model begins with the MM model without corporate taxes and then adds personal taxes.

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

According to the MM extension with growth, what is Kitto's value of equity?

a world with no taxes, MM show that a firm's capital structure does not affect the firm's value However, when taxes are considered, MM show a positive relationship between debt and value, i.e., its value rises as its debt is increased.

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

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

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

Which of the following statements concerning capital structure theory is NOT CORRECT?

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

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.

Overview

Risk and Return: Part I

Risk and Return: Part II

Bonds

Stocks

Financial Options

Financial Analysis

Forecasting

Cost of Capital

Corporate Valuation

Capital Budgeting

Cash Flows and Risk

Real Options

Cap Structure

Dividends

Ipos, Invsmt Banking

Leasing

Hybrids

Working Capital

Derivatives

Bankruptcy, Reorganization, and Liquidation

Mergers

Filters