Question 1

In M&M's perfect world, their theorem's two main propositions are referred to as which of the following?

Accepted Answer

A)  active capital structure management 
B)  passive capital structure management 
C)  capital structure irrelevance assertion 
D)  capital structure relevance assertion 
A)  active capital structure management 
B)  passive capital structure management 
C)  capital structure irrelevance assertion 
D)  capital structure relevance assertion C

Question 2

HiLo, Inc., doesn't face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:   The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the standard deviation in EPS if they switch to the proposed capital structure?

Accepted Answer

A)  $7.91 
B)  $7.54 
C)  $6.59 
D)  $6.13 
A)  $7.91 
B)  $7.54 
C)  $6.59 
D)  $6.13 B

Question 3

This is the level of EBIT at which EPS will be equal for two different capital structures.

Accepted Answer

A)  Break-even EBIT 
B)  Break-even EPS 
C)  Break-even capital structures 
D)  Break-even financial structures 
A)  Break-even EBIT 
B)  Break-even EPS 
C)  Break-even capital structures 
D)  Break-even financial structures A

Question 4

If an investor wanted to reduce the risk of a levered stock in their portfolio, how could they go about doing so while still retaining shares in the company?

Accepted Answer

A)  They could sell some of their shares and use the proceeds to buy the firm's bonds. 
B)  They could sell some of their bonds and use the proceeds to buy the firm's stock. 
C)  They could use borrowed funds to buy more of the firm's stock. 
D)  None of these. 
A)  They could sell some of their shares and use the proceeds to buy the firm's bonds. 
B)  They could sell some of their bonds and use the proceeds to buy the firm's stock. 
C)  They could use borrowed funds to buy more of the firm's stock. 
D)  None of these.

Question 5

A firm faces a 30% tax rate and has $500M in assets, currently financed entirely with equity. Equity is worth $100 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected EBIT is $60M. The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. How much will ROE change if they switch to the proposed capital structure?

Accepted Answer

A)  There will no change in the firm's ROE. 
B)  The ROE will increase by 0.47%. 
C)  The ROE will increase by 1.15%. 
D)  The ROE will increase by 0.82%. 
A)  There will no change in the firm's ROE. 
B)  The ROE will increase by 0.47%. 
C)  The ROE will increase by 1.15%. 
D)  The ROE will increase by 0.82%.

Question 6

What two main factors come into play when a firm is deciding to change its funding mix with regard to their capital structure?

Accepted Answer

1. Whether debt interest payments are ta

Question 7

JJJ Corp has $10 million in assets and is currently financed with 100% equity. The firm decides to switch to a 60% equity/40% debt structure and decides to sell $4 million of debt and use the proceeds to retire $4 million in equity today. This is an example of _________________.

Accepted Answer

A)  Underinvestment 
B)  Active Capital Structure Management 
C)  Modigliani-Miller Theorem in practice 
D)  None of these. 
A)  Underinvestment 
B)  Active Capital Structure Management 
C)  Modigliani-Miller Theorem in practice 
D)  None of these.

Question 8

This is the mix of debt and equity that a firm uses to finance its operations.

Accepted Answer

A)  capital structure 
B)  capital management 
C)  separation structure 
D)  break even 
A)  capital structure 
B)  capital management 
C)  separation structure 
D)  break even

Question 9

This is another name for debt in the capital structure.

Accepted Answer

A)  active 
B)  leverage 
C)  passive 
D)  long position 
A)  active 
B)  leverage 
C)  passive 
D)  long position

Question 10

An all-equity financed firm has $350 in assets and the stock price is $10. If the firm restructures with 20% debt which creates interest expense of $14 per year and the firm's tax rate is 40%, what is the break-even EBIT?

Accepted Answer

A)  $70 
B)  $67 
C)  $74 
D)  $79 
A)  $70 
B)  $67 
C)  $74 
D)  $79

Question 11

Why does the optimal capital structure shift from "debt doesn't matter" to "the more debt, the better" when we add corporate taxation to our assumptions?

Accepted Answer

With interest on debt being tax deductib

Question 12

An all-equity financed firm has $450 in assets and the stock price is $45. If the firm restructures with 20% debt which creates interest expense of $10 per year and the firm's tax rate is 40%, what is the break-even EBIT?

Accepted Answer

A)  $30 
B)  $35 
C)  $45 
D)  $50 
A)  $30 
B)  $35 
C)  $45 
D)  $50

Question 13

Your company has a 38% tax rate and has $800 million in assets, currently financed entirely with equity. Equity is worth $60 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:   The firm is considering switching to a 20-percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

Accepted Answer

A)  $1.98 
B)  $2.29 
C)  $2.36 
D)  $2.44 
A)  $1.98 
B)  $2.29 
C)  $2.36 
D)  $2.44

Question 14

Your company doesn't face any taxes and has $300 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:   The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the break-even EBIT?

Accepted Answer

A)  $19,000,000 
B)  $21,200,000 
C)  $27,000,000 
D)  $30,000,000 
A)  $19,000,000 
B)  $21,200,000 
C)  $27,000,000 
D)  $30,000,000

Question 15

Differentiate between active and passive changes to capital structure.

Accepted Answer

The firm actually sells one type of fina

Question 16

All else the same, firms facing relatively high tax rates should ______________.

Accepted Answer

A)  Use more debt 
B)  Use less debt 
C)  Have lower E/E ratios 
D)  None of these 
A)  Use more debt 
B)  Use less debt 
C)  Have lower E/E ratios 
D)  None of these

Question 17

HiLo, Inc., faces a 38% tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:   The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the level of expected EPS if they switch to the proposed capital structure?

Accepted Answer

A)  $2.33 
B)  $3.68 
C)  $4.17 
D)  $4.91 
A)  $2.33 
B)  $3.68 
C)  $4.17 
D)  $4.91

Question 18

Your company has a 40% tax rate and has $750 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:   The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

Accepted Answer

A)  $8.56 
B)  $8.84 
C)  $8.88 
D)  $25.67 
A)  $8.56 
B)  $8.84 
C)  $8.88 
D)  $25.67

Question 19

A firm faces a 30% tax rate and has $200M in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected EBIT is $10M. The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the firm's new ROE if they switch to the proposed capital structure?

Accepted Answer

A)  2.33% 
B)  2.86% 
C)  2.39% 
D)  1.04% 
A)  2.33% 
B)  2.86% 
C)  2.39% 
D)  1.04%

Question 20

Your company doesn't face any taxes and has $750 million in assets, currently financed entirely with equity. Equity is worth $25 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:   The firm is considering switching to a 25-percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

Accepted Answer

A)  $1.06 
B)  $1.17 
C)  $2.27 
D)  $2.28 
A)  $1.06 
B)  $1.17 
C)  $2.27 
D)  $2.28

In M&M's perfect world, their theorem's two main propositions are referred to as which of the following?

This is the level of EBIT at which EPS will be equal for two different capital structures.

If an investor wanted to reduce the risk of a levered stock in their portfolio, how could they go about doing so while still retaining shares in the company?

What two main factors come into play when a firm is deciding to change its funding mix with regard to their capital structure?

JJJ Corp has $10 million in assets and is currently financed with 100% equity. The firm decides to switch to a 60% equity/40% debt structure and decides to sell $4 million of debt and use the proceeds to retire $4 million in equity today. This is an example of _________________.

This is the mix of debt and equity that a firm uses to finance its operations.

This is another name for debt in the capital structure.

An all-equity financed firm has $350 in assets and the stock price is $10. If the firm restructures with 20% debt which creates interest expense of $14 per year and the firm's tax rate is 40%, what is the break-even EBIT?

Why does the optimal capital structure shift from "debt doesn't matter" to "the more debt, the better" when we add corporate taxation to our assumptions?

An all-equity financed firm has $450 in assets and the stock price is $45. If the firm restructures with 20% debt which creates interest expense of $10 per year and the firm's tax rate is 40%, what is the break-even EBIT?

Differentiate between active and passive changes to capital structure.

All else the same, firms facing relatively high tax rates should ______________.

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Exam 16: Assessing Long-Term Debt, Equity, and Capital Structure

In M&M's perfect world, their theorem's two main propositions are referred to as which of the following?

This is the level of EBIT at which EPS will be equal for two different capital structures.

If an investor wanted to reduce the risk of a levered stock in their portfolio, how could they go about doing so while still retaining shares in the company?

What two main factors come into play when a firm is deciding to change its funding mix with regard to their capital structure?

JJJ Corp has $10 million in assets and is currently financed with 100% equity. The firm decides to switch to a 60% equity/40% debt structure and decides to sell $4 million of debt and use the proceeds to retire $4 million in equity today. This is an example of _________________.

This is the mix of debt and equity that a firm uses to finance its operations.

This is another name for debt in the capital structure.

An all-equity financed firm has $350 in assets and the stock price is $10. If the firm restructures with 20% debt which creates interest expense of $14 per year and the firm's tax rate is 40%, what is the break-even EBIT?

Why does the optimal capital structure shift from "debt doesn't matter" to "the more debt, the better" when we add corporate taxation to our assumptions?

An all-equity financed firm has $450 in assets and the stock price is $45. If the firm restructures with 20% debt which creates interest expense of $10 per year and the firm's tax rate is 40%, what is the break-even EBIT?

Differentiate between active and passive changes to capital structure.

All else the same, firms facing relatively high tax rates should ______________.

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters