Question 1

Debt usage will have an effect on:

Accepted Answer

A)  business risk. 
B)  financial risk. 
C)  operating risk. 
D)  asset risk. 
A)  business risk. 
B)  financial risk. 
C)  operating risk. 
D)  asset risk.

Question 2

A firm issues 100,000 equity shares with a total market value of $5,000,000.The firm's market value of debt is also of equal amount,i.e.,$5,000,000.The firm is expected to generate $1.5 million in operating income and pay $250,000 in interest.Ignoring taxes,this will generate $12.50 earnings per share.What will happen to EPS if the firm's borrowing and interest expense increases by 75% and the number of shares in circulation is cut by 75% (assuming that the share price remains unchanged with this change in capital structure)?

Accepted Answer

A)  EPS decrease to $10.00 
B)  EPS decrease to $11.67 
C)  EPS increase to $15.00 
D)  EPS increase to $42.50 
A)  EPS decrease to $10.00 
B)  EPS decrease to $11.67 
C)  EPS increase to $15.00 
D)  EPS increase to $42.50

Question 3

Although the value of an additional interest tax shield may be positive,firms may restrict borrowing if:

Accepted Answer

A)  the returns on the project are too high. 
B)  their asset base is largely intangible. 
C)  their asset beta is zero. 
D)  the borrowing increases their WACC. 
A)  the returns on the project are too high. 
B)  their asset base is largely intangible. 
C)  their asset beta is zero. 
D)  the borrowing increases their WACC.

Question 4

Calculate the return and risk premium on the common stock after the refinancing.

Accepted Answer

r_equity = r_assets + D/E × (r_assets - r

Question 5

Under the assumptions necessary for MM I,if investors can borrow or lend at the same terms as the firm,they will:

Accepted Answer

A)  invest in debt only and ignore equity investments. 
B)  not be willing to pay more for a restructured firm. 
C)  require a higher rate of return on equity. 
D)  accept a lower rate of return on equity. 
A)  invest in debt only and ignore equity investments. 
B)  not be willing to pay more for a restructured firm. 
C)  require a higher rate of return on equity. 
D)  accept a lower rate of return on equity.

Question 6

What is the after-tax cost of debt for a firm in the 35% tax bracket that pays 15% on its debt?

Accepted Answer

A)  5.25% 
B)  9.75% 
C)  12.17% 
D)  20.25% 
A)  5.25% 
B)  9.75% 
C)  12.17% 
D)  20.25%

Question 7

What's the pecking order theory?

Accepted Answer

The pecking order theory says that firms

Question 8

What is the proportion of equity financing for a firm that expects a 15% return on equity,a 10% return on assets,and an 8% return on debt? Ignore taxes.

Accepted Answer

A)  25% 
B)  29% 
C)  75% 
D)  71% 
A)  25% 
B)  29% 
C)  75% 
D)  71%

Question 9

The optimal capital structure is met when:

Accepted Answer

A)  additional borrowing results in lower financial distress costs. 
B)  additional borrowing is offset by the interest tax shield. 
C)  the tax savings from additional leverage is just offset by the costs of distress. 
D)  the present value of the tax shield is greater than the value of an all-equity financed firm. 
A)  additional borrowing results in lower financial distress costs. 
B)  additional borrowing is offset by the interest tax shield. 
C)  the tax savings from additional leverage is just offset by the costs of distress. 
D)  the present value of the tax shield is greater than the value of an all-equity financed firm.

Question 10

A firm is expected to generate $1.5 million in operating income and pay $250,000 in interest.Ignoring taxes,this will generate $12.50 earnings per share.What will happen to EPS if operating income increases to $2.0 million?

Accepted Answer

A)  EPS will increase to $15.63. 
B)  EPS will increase to $16.67. 
C)  EPS will increase to $17.50. 
D)  EPS will increase to $20.00. 
A)  EPS will increase to $15.63. 
B)  EPS will increase to $16.67. 
C)  EPS will increase to $17.50. 
D)  EPS will increase to $20.00.

Question 11

When corporate taxes and the cost of financial distress are taken into consideration,the market value of a firm equals the value of all-equity financed _____ the PV of the tax shield _____ the PV costs of financial distress.

Accepted Answer

A)  Plus; plus 
B)  Minus; plus 
C)  Plus; minus 
D)  Minus; minus 
A)  Plus; plus 
B)  Minus; plus 
C)  Plus; minus 
D)  Minus; minus

Question 12

A firm's business risk depends upon:

Accepted Answer

A)  its use of debt in the capital structure. 
B)  the risk of the firm's assets and operations. 
C)  whether individuals are able to undo the leverage. 
D)  the costs of financial distress. 
A)  its use of debt in the capital structure. 
B)  the risk of the firm's assets and operations. 
C)  whether individuals are able to undo the leverage. 
D)  the costs of financial distress.

Question 13

Financial leverage describes debt financing's amplification of the effects of changes in operating income on the returns to stockholders.

Accepted Answer

A) True 
 B)False

Question 14

When debt is risky under MM II:

Accepted Answer

A)  bond holders shift more of the risk to equity holders. 
B)  equity holders shift more of the risk to bond holders. 
C)  the value of the interest tax shield is at its highest. 
D)  there is more overall risk in the firm. 
A)  bond holders shift more of the risk to equity holders. 
B)  equity holders shift more of the risk to bond holders. 
C)  the value of the interest tax shield is at its highest. 
D)  there is more overall risk in the firm.

Question 15

By changing the mix of securities a firm uses for financing,the financial manager:

Accepted Answer

A)  can increase the book value of the firm. 
B)  is changing the firm's capital structure. 
C)  can increase the market value of the firm. 
D)  is changing the firm's dividend policy. 
A)  can increase the book value of the firm. 
B)  is changing the firm's capital structure. 
C)  can increase the market value of the firm. 
D)  is changing the firm's dividend policy.

Question 16

A firm with a debt equity ratio of 1/3,return on assets of 15%,and return on debt of 10% will have return on equity of:

Accepted Answer

A)  15.00%. 
B)  16.67%. 
C)  20.00%. 
D)  21.17%. 
A)  15.00%. 
B)  16.67%. 
C)  20.00%. 
D)  21.17%.

Question 17

The reason that financial leverage increases shareholder risk is that there is:

Accepted Answer

A)  more debt which increases the operating risk. 
B)  less equity to absorb the operating risk. 
C)  less business risk to be spread around. 
D)  more financial risk due to reduced business risk. 
A)  more debt which increases the operating risk. 
B)  less equity to absorb the operating risk. 
C)  less business risk to be spread around. 
D)  more financial risk due to reduced business risk.

Question 18

Which of the following would not be expected to change with changes in the firm's capital structure?

Accepted Answer

A)  weighted-average cost of capital. 
B)  expected return on equity. 
C)  expected return on assets. 
D)  expected earnings per share. 
A)  weighted-average cost of capital. 
B)  expected return on equity. 
C)  expected return on assets. 
D)  expected earnings per share.

Question 19

What is the expected rate of return to equity holders if the firm has a 35% tax rate,a 10% rate of interest paid on debt,a 15% WACC and a 60% debt-asset ratio?

Accepted Answer

A)  12.50% 
B)  21.25% 
C)  22.50% 
D)  27.75% 
A)  12.50% 
B)  21.25% 
C)  22.50% 
D)  27.75%

Question 20

If the present value of the tax shield equals the present value of the costs of financial distress,then the:

Accepted Answer

A)  firm is using the optimal level of debt. 
B)  firm is paying too high an interest rate. 
C)  firm's market value equals the value of the unlevered firm. 
D)  firm should increase its use of debt. 
A)  firm is using the optimal level of debt. 
B)  firm is paying too high an interest rate. 
C)  firm's market value equals the value of the unlevered firm. 
D)  firm should increase its use of debt.

Exam 16: Debt and Payout Policy

Debt usage will have an effect on:

Although the value of an additional interest tax shield may be positive,firms may restrict borrowing if:

Calculate the return and risk premium on the common stock after the refinancing.

Under the assumptions necessary for MM I,if investors can borrow or lend at the same terms as the firm,they will:

What is the after-tax cost of debt for a firm in the 35% tax bracket that pays 15% on its debt?

What's the pecking order theory?

What is the proportion of equity financing for a firm that expects a 15% return on equity,a 10% return on assets,and an 8% return on debt? Ignore taxes.

The optimal capital structure is met when:

A firm is expected to generate $1.5 million in operating income and pay $250,000 in interest.Ignoring taxes,this will generate $12.50 earnings per share.What will happen to EPS if operating income increases to $2.0 million?

When corporate taxes and the cost of financial distress are taken into consideration,the market value of a firm equals the value of all-equity financed _____ the PV of the tax shield _____ the PV costs of financial distress.

A firm's business risk depends upon:

Financial leverage describes debt financing's amplification of the effects of changes in operating income on the returns to stockholders.

When debt is risky under MM II:

By changing the mix of securities a firm uses for financing,the financial manager:

A firm with a debt equity ratio of 1/3,return on assets of 15%,and return on debt of 10% will have return on equity of:

The reason that financial leverage increases shareholder risk is that there is:

Which of the following would not be expected to change with changes in the firm's capital structure?

What is the expected rate of return to equity holders if the firm has a 35% tax rate,a 10% rate of interest paid on debt,a 15% WACC and a 60% debt-asset ratio?

If the present value of the tax shield equals the present value of the costs of financial distress,then the:

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, IPOs, and Seasoned Offerings

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters

When corporate taxes and the cost of financial distress are taken into consideration,the market value of a firm equals the value of all-equity financed _ the PV of the tax shield _ the PV costs of financial distress.