Question 1

Modigliani and Miller (MM)won Nobel Prizes for their work on capital structure theory.

Accepted Answer

A) True 
 B)False

Question 2

Your firm's debt ratio is only 5.00%,but the new CFO thinks that more debt should be employed.She wants to sell bonds and use the proceeds to buy back and retire common shares so the percentage of common equity in the capital structure (wc)= 1 - wd.Other things held constant,and based on the data below,if the firm increases the percentage of debt in its capital structure (wd)to 60.0%,by how much would the ROE change,i.e. ,what is ROENew - ROEOld? Do not round your intermediate calculations. $\begin{array}{lrlr}\text { Operating Data }&&\text { Other Data }\
\text { Capital } & \$ 150,000 & \text { Old wd } & 5 \% \
\text { ROIC = EBIT }(1-\text { T)/Capital } & 20.00 \% & \text { Old interest rate } & 10 \% \
\text { Tax rate } & 35 \% & \text { New wd } & 60 \% \
& & \text { New interest rate } & 12 \%
\end{array}$
?

Accepted Answer

A)  14.95% 
B)  19.17% 
C)  17.59% 
D)  21.64% 
E)  14.42% 
A)  14.95% 
B)  19.17% 
C)  17.59% 
D)  21.64% 
E)  14.42%

Question 3

Southeast U's campus book store sells course packs for $15.00 each,the variable cost per pack is $11.00,fixed costs for this operation are $300,000,and annual sales are 75,000 packs.The unit variable cost consists of a $4.00 royalty payment,VR ,per pack to professors plus other variable costs of VO = $7.00.The royalty payment is negotiable.The book store's directors believe that the store should earn a profit margin of 10% on sales,and they want the store's managers to pay a royalty rate that will produce that profit margin.What royalty per pack would permit the store to earn a 10% profit margin on course packs,other things held constant? Do not round your intermediate calculations.

Accepted Answer

A)  $2.50 
B)  $1.88 
C)  $2.78 
D)  $2.25 
E)  $2.00 
A)  $2.50 
B)  $1.88 
C)  $2.78 
D)  $2.25 
E)  $2.00

Question 4

The firm's target capital structure should do which of the following?

Accepted Answer

A)  Maximize the earnings per share (EPS). 
B)  Minimize the cost of debt (rd). 
C)  Obtain the highest possible bond rating. 
D)  Minimize the cost of equity (rs). 
E)  Minimize the weighted average cost of capital (WAC
C) . 
A)  Maximize the earnings per share (EPS). 
B)  Minimize the cost of debt (rd). 
C)  Obtain the highest possible bond rating. 
D)  Minimize the cost of equity (rs). 
E)  Minimize the weighted average cost of capital (WAC
C) .

Question 5

The trade-off theory states that capital structure decisions involve a tradeoff between the costs and benefits of debt financing.

Accepted Answer

A) True 
 B)False

Question 6

Assume that you and your brother plan to open a business that will make and sell a newly designed type of sandal.Two robotic machines are available to make the sandals,Machine A and Machine B.The price per pair will be $30.00 regardless of which machine is used.The fixed and variable costs associated with the two machines are shown below.What is the difference between the break-even points for Machines A and B? Do not round your intermediate calculations.(Hint: Find BEB - BEA) $\begin{array}{lrr} 
& \text { Machine A } & \text { Machine B } \
\text { Price per pair (P) } & \$ 30.00 & \$ 30.00 \
\text { Fixed costs (F) } & \$ 25,000 & \$ 100,000 \
\text { Variable cost/unit (V) } & \$ 7.00 & \$ 4.00
\end{array}$
?

Accepted Answer

A)  3,035 
B)  2,235 
C)  2,069 
D)  2,621 
E)  2,759 
A)  3,035 
B)  2,235 
C)  2,069 
D)  2,621 
E)  2,759

Question 7

Southwest U's campus book store sells course packs for $18 each,the variable cost per pack is $8,fixed costs to produce the packs are $200,000,and expected annual sales are 51,000 packs.What are the pre-tax profits from sales of course packs?

Accepted Answer

A)  $285,200 
B)  $310,000 
C)  $306,900 
D)  $248,000 
E)  $372,000 
A)  $285,200 
B)  $310,000 
C)  $306,900 
D)  $248,000 
E)  $372,000

Question 8

Which of the following statements is CORRECT,holding other things constant?

Accepted Answer

A)  Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs,hence they tend to use relatively little debt. 
B)  An increase in the personal tax rate is likely to increase the debt ratio of the average corporation. 
C)  If changes in the bankruptcy code make bankruptcy less costly to corporations,then this would likely lead to lower debt ratios for corporations. 
D)  An increase in the company's degree of operating leverage would tend to encourage the firm to use more debt in its capital structure so as to keep its total risk unchanged. 
E)  An increase in the corporate tax rate would in theory encourage companies to use more debt in their capital structures. 
A)  Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs,hence they tend to use relatively little debt. 
B)  An increase in the personal tax rate is likely to increase the debt ratio of the average corporation. 
C)  If changes in the bankruptcy code make bankruptcy less costly to corporations,then this would likely lead to lower debt ratios for corporations. 
D)  An increase in the company's degree of operating leverage would tend to encourage the firm to use more debt in its capital structure so as to keep its total risk unchanged. 
E)  An increase in the corporate tax rate would in theory encourage companies to use more debt in their capital structures.

Modigliani and Miller (MM)won Nobel Prizes for their work on capital structure theory.

The firm's target capital structure should do which of the following?

The trade-off theory states that capital structure decisions involve a tradeoff between the costs and benefits of debt financing.

Southwest U's campus book store sells course packs for $18 each,the variable cost per pack is $8,fixed costs to produce the packs are $200,000,and expected annual sales are 51,000 packs.What are the pre-tax profits from sales of course packs?

Which of the following statements is CORRECT,holding other things constant?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles

Mergers and Acquisitions

Filters

Exam 14: Capital Structure and Leverage

Modigliani and Miller (MM)won Nobel Prizes for their work on capital structure theory.

The firm's target capital structure should do which of the following?

The trade-off theory states that capital structure decisions involve a tradeoff between the costs and benefits of debt financing.

Southwest U's campus book store sells course packs for $18 each,the variable cost per pack is $8,fixed costs to produce the packs are $200,000,and expected annual sales are 51,000 packs.What are the pre-tax profits from sales of course packs?

Which of the following statements is CORRECT,holding other things constant?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles

Mergers and Acquisitions

Filters