Question 1

showed that in a world with taxes, a firm's optimal capital structure would be almost 100% debt.

Accepted Answer

A) True 
 B)False

Question 2

Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

Accepted Answer

A) True 
 B)False

Question 3

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 rate of 5%, 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 Firm L's cost of equity?

Accepted Answer

A)  11.4% 
B)  12.0% 
C)  12.6% 
D)  13.3% 
E)  14.0% 
A)  11.4% 
B)  12.0% 
C)  12.6% 
D)  13.3% 
E)  14.0%

Question 4

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 debt if its equity is viewed as an option?

Accepted Answer

A)  $167.57 
B)  $186.19 
C)  $204.81 
D)  $225.29 
E)  $247.82 
A)  $167.57 
B)  $186.19 
C)  $204.81 
D)  $225.29 
E)  $247.82

Question 5

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 increases with the amount of debt. 
E)  The tax shields should be discounted at the cost of debt. 
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 increases with the amount of debt. 
E)  The tax shields should be discounted at the cost of debt.

showed that in a world with taxes, a firm's optimal capital structure would be almost 100% debt.

Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

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

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

showed that in a world with taxes, a firm's optimal capital structure would be almost 100% debt.

Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

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

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