Question 1

In general,the gain to investors from the tax deductibility of interest payments is referred to as the interest rate tax shield.

Accepted Answer

A) True 
 B)False

Question 2

What are the issues in determining the optimal leverage for a firm?

Accepted Answer

While interest tax shield tends to incre

Question 3

A new business requires a $20,000 investment today,and will generate a one-time cash flow of $25,000 after one year.The business will be financed with 20% equity and 80% debt.If the firm can borrow at 4%,what is the return on levered equity?

Accepted Answer

A)  25% 
B)  21% 
C)  109% 
D)  125% 
E)  33% 
A)  25% 
B)  21% 
C)  109% 
D)  125% 
E)  33%

Question 4

Use the information for the question(s) below.
Luther is a successful logistical services firm that currently has $5 billion in cash. Luther has decided to use this cash to repurchase shares from its investors and has already announced the stock repurchase plan. Currently Luther is an all-equity firm with 1.25 billion shares outstanding. Luther's shares are currently trading at $20 per share.
-With perfect capital markets,what is the market price per share of Luther's stock after the share repurchase?

Accepted Answer

A)  $25 
B)  $24 
C)  $15 
D)  $20 
E)  $18 
A)  $25 
B)  $24 
C)  $15 
D)  $20 
E)  $18

Question 5

Use the information for the question(s) below.
Consider two firms, With and Without, that have identical assets that generate identical cash flows. Without is an all-equity firm, with 1 million shares outstanding that trade at a price of $24 per share. With has 2 million shares outstanding and $12 million of debt at an interest rate of 5%.
-Assume that MM's perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5000 of your own money to invest and you plan on buying With stock.Using homemade (un)leverage,how much do you need to invest at the risk-free rate so that the payoff of your account will be the same as a $5000 investment in Without stock?

Accepted Answer

A)  $5000 
B)  $0 
C)  $2500 
D)  $4000 
E)  -$5000 (borrow $5000) 
A)  $5000 
B)  $0 
C)  $2500 
D)  $4000 
E)  -$5000 (borrow $5000)

Question 6

Managers should make use of the interest tax shield if the firm has

Accepted Answer

A)  consistent taxable income. 
B)  volatility in taxable income. 
C)  consistent dividend payments. 
D)  low tax rates. 
E)  many tangible assets. 
A)  consistent taxable income. 
B)  volatility in taxable income. 
C)  consistent dividend payments. 
D)  low tax rates. 
E)  many tangible assets.

Question 7

The probability of financial distress depends on the

Accepted Answer

A)  likelihood that a firm will be unable to meet its debt commitments. 
B)  chance that a firm's raw material costs will increase. 
C)  likelihood of dividend payments. 
D)  likelihood of asset growth. 
E)  likelihood of issuing new debt. 
A)  likelihood that a firm will be unable to meet its debt commitments. 
B)  chance that a firm's raw material costs will increase. 
C)  likelihood of dividend payments. 
D)  likelihood of asset growth. 
E)  likelihood of issuing new debt.

Question 8

Use the information for the question(s) below.
Luther is a successful logistical services firm that currently has $5 billion in cash. Luther has decided to use this cash to repurchase shares from its investors and has already announced the stock repurchase plan. Currently Luther is an all-equity firm with 1.25 billion shares outstanding. Luther's shares are currently trading at $20 per share.
-Assume that in addition to 1.25 billion common shares outstanding,Luther has stock options given to employees valued at $2 billion.After the repurchase,how many shares will Luther have outstanding?

Accepted Answer

A)  1.0 billion 
B)  1.2 billion 
C)  0.75 billion 
D)  1.1 billion 
E)  1.25 billion 
A)  1.0 billion 
B)  1.2 billion 
C)  0.75 billion 
D)  1.1 billion 
E)  1.25 billion

Question 9

A firm is currently financed with 50% equity and 50% debt.The firm generates perpetual earnings after taxes and interest rates of $10 million per year.The firm's cost of equity is 14%,its cost of debt is 7%,and it has a tax rate of 30%.What is the value of the levered firm?

Accepted Answer

A)  $10 million 
B)  $73 million 
C)  $105.8 million 
D)  $173.5 million 
E)  $100 million 
A)  $10 million 
B)  $73 million 
C)  $105.8 million 
D)  $173.5 million 
E)  $100 million

Question 10

Leverage can ________ a firm's expected earnings per share,but does not necessarily increase the share price.

Accepted Answer

A)  decrease 
B)  dilute 
C)  increase 
D)  not change 
E)  decrease the variation of 
A)  decrease 
B)  dilute 
C)  increase 
D)  not change 
E)  decrease the variation of

Question 11

Under perfect capital markets,which of the following statements is regarding capital structure is most accurate?

Accepted Answer

A)  As long as the firm's choice of securities does not change the cash flows generated by its assets, the capital structure decision will not change the total value of the firm or the amount of capital it can raise. 
B)  If securities are fairly priced, then buying or selling securities has a positive net present value (NPV) and will, therefore, change the value of a firm. 
C)  The future repayments that the firm must make on its debt are larger than the amount of the loan it receives up front. 
D)  An investor who would like more leverage than the firm has chosen can lend and add leverage to his or her own portfolio. 
E)  The firm can increase debt levels to increase firm value. 
A)  As long as the firm's choice of securities does not change the cash flows generated by its assets, the capital structure decision will not change the total value of the firm or the amount of capital it can raise. 
B)  If securities are fairly priced, then buying or selling securities has a positive net present value (NPV) and will, therefore, change the value of a firm. 
C)  The future repayments that the firm must make on its debt are larger than the amount of the loan it receives up front. 
D)  An investor who would like more leverage than the firm has chosen can lend and add leverage to his or her own portfolio. 
E)  The firm can increase debt levels to increase firm value.

Question 12

A firm has a market value of assets of $50,000.It borrows $10,000 at 3%.If the unlevered cost of equity is 15%,what is the firm's cost of equity capital?

Accepted Answer

A)  15% 
B)  16% 
C)  17% 
D)  18% 
E)  19% 
A)  15% 
B)  16% 
C)  17% 
D)  18% 
E)  19%

Question 13

Equity in a firm with debt is called

Accepted Answer

A)  risk-free equity. 
B)  risky equity. 
C)  shareholders' equity. 
D)  unlevered equity. 
E)  levered equity. 
A)  risk-free equity. 
B)  risky equity. 
C)  shareholders' equity. 
D)  unlevered equity. 
E)  levered equity.

Question 14

With perfect capital markets,because different choices of capital structure offer a benefit to investors,they affect the value of the firm.

Accepted Answer

A) True 
 B)False

Question 15

A firm requires an investment of $40,000 and borrows $10,000 at 8%.If the return on equity is 20%,what is the firm's pre tax WACC?

Accepted Answer

A)  14% 
B)  15% 
C)  16% 
D)  17% 
E)  18% 
A)  14% 
B)  15% 
C)  16% 
D)  17% 
E)  18%

Question 16

A firm requires an investment of $30,000 and borrows $10,000 at 6%.If the tax rate is 30%,and the firm's WACC is 11.4%,what is the firm's cost of equity?

Accepted Answer

A)  15% 
B)  14.1% 
C)  5.4% 
D)  17.4% 
E)  15.6% 
A)  15% 
B)  14.1% 
C)  5.4% 
D)  17.4% 
E)  15.6%

Question 17

A firm requires an investment of $30,000 and borrows $20,000 at 7%.If the return on equity is 15% and the tax rate is 30%,what is the firm's WACC?

Accepted Answer

A)  8.27% 
B)  9.13% 
C)  10.4% 
D)  8.91% 
E)  9.67% 
A)  8.27% 
B)  9.13% 
C)  10.4% 
D)  8.91% 
E)  9.67%

Question 18

A new business will generate a one-time cash flow of $22,000 after one year.The business will be financed with 60% equity and 40% debt.If the firm's unlevered equity cost of capital is 11%,what is the levered value of the firm with perfect capital markets?

Accepted Answer

A)  $18,182 
B)  $20,000 
C)  $19,820 
D)  $24,200 
E)  $19,580 
A)  $18,182 
B)  $20,000 
C)  $19,820 
D)  $24,200 
E)  $19,580

Question 19

Use the information for the question(s) below.
Luther is a successful logistical services firm that currently has $5 billion in cash. Luther has decided to use this cash to repurchase shares from its investors and has already announced the stock repurchase plan. Currently Luther is an all-equity firm with 1.25 billion shares outstanding. Luther's shares are currently trading at $20 per share.
-Suppose Blank Company has only one project,as forecast above,and an unlevered cost of equity of 8%.What is the value of the company?

Accepted Answer

A)  $23,148.15 
B)  $32,407.40 
C)  $41,666.67 
D)  $43,356.43 
E)  $51,621.95 
A)  $23,148.15 
B)  $32,407.40 
C)  $41,666.67 
D)  $43,356.43 
E)  $51,621.95

Question 20

A firm requires an investment of $100,000,financed with $60,000 of equity and the remainder with debt.If the return on equity is 12%,the cost of debt is 4% and the tax rate is 35%,what is the firm's WACC?

Accepted Answer

A)  6.64% 
B)  7.20% 
C)  7.96% 
D)  8.24% 
E)  8.80% 
A)  6.64% 
B)  7.20% 
C)  7.96% 
D)  8.24% 
E)  8.80%

Exam 16: Capital Structure

In general,the gain to investors from the tax deductibility of interest payments is referred to as the interest rate tax shield.

What are the issues in determining the optimal leverage for a firm?

A new business requires a $20,000 investment today,and will generate a one-time cash flow of $25,000 after one year.The business will be financed with 20% equity and 80% debt.If the firm can borrow at 4%,what is the return on levered equity?

Managers should make use of the interest tax shield if the firm has

The probability of financial distress depends on the

A firm is currently financed with 50% equity and 50% debt.The firm generates perpetual earnings after taxes and interest rates of $10 million per year.The firm's cost of equity is 14%,its cost of debt is 7%,and it has a tax rate of 30%.What is the value of the levered firm?

Leverage can ________ a firm's expected earnings per share,but does not necessarily increase the share price.

Under perfect capital markets,which of the following statements is regarding capital structure is most accurate?

A firm has a market value of assets of $50,000.It borrows $10,000 at 3%.If the unlevered cost of equity is 15%,what is the firm's cost of equity capital?

Equity in a firm with debt is called

With perfect capital markets,because different choices of capital structure offer a benefit to investors,they affect the value of the firm.

A firm requires an investment of $40,000 and borrows $10,000 at 8%.If the return on equity is 20%,what is the firm's pre tax WACC?

A firm requires an investment of $30,000 and borrows $10,000 at 6%.If the tax rate is 30%,and the firm's WACC is 11.4%,what is the firm's cost of equity?

A firm requires an investment of $30,000 and borrows $20,000 at 7%.If the return on equity is 15% and the tax rate is 30%,what is the firm's WACC?

A new business will generate a one-time cash flow of $22,000 after one year.The business will be financed with 60% equity and 40% debt.If the firm's unlevered equity cost of capital is 11%,what is the levered value of the firm with perfect capital markets?

A firm requires an investment of $100,000,financed with $60,000 of equity and the remainder with debt.If the return on equity is 12%,the cost of debt is 4% and the tax rate is 35%,what is the firm's WACC?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

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