Question 1

If Rosewood had no interest expense,its net income would be closest to:

Accepted Answer

A) $405 million 
B) $160 million 
C) $450 million 
D) $290 million 
A) $405 million 
B) $160 million 
C) $450 million 
D) $290 million

Question 2

Consider the following formula:
VL = VU +  
The term  
Represents:

Accepted Answer

A) the value of the firm with leverage. 
B) the present value of the interest tax shield. 
C) the preset value of the future interest payments. 
D) the interest tax shield each year. 
A) the value of the firm with leverage. 
B) the present value of the interest tax shield. 
C) the preset value of the future interest payments. 
D) the interest tax shield each year.

Question 3

Consider the following formula:
Τ* =  
The term τi is:

Accepted Answer

A) the effective personal tax rate on interest income. 
B) the effective personal tax rate on equity. 
C) the effective corporate tax rate on income. 
D) the effective tax advantage of debt. 
A) the effective personal tax rate on interest income. 
B) the effective personal tax rate on equity. 
C) the effective corporate tax rate on income. 
D) the effective tax advantage of debt.

Question 4

If Flagstaff currently maintains a .5 debt to equity ratio,then the value of Flagstaff as an all equity firm would be closest to:

Accepted Answer

A) $80 million 
B) $100 million 
C) $73 million 
D) $115 million 
A) $80 million 
B) $100 million 
C) $73 million 
D) $115 million

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) Once investors know the recap will occur,the share price will rise immediately to a level that reflects the value of the interest tax shield that the firm will receive from its recapitalization. 
B) When securities are fairly priced,the original shareholders of a firm capture the full benefit of the interest tax shield from an increase in leverage. 
C) In the presence of corporate taxes,we do not include the interest tax shield as one of the firm's assets on its market value balance sheet. 
D) We can analyze the recapitalization using the market value balance sheet;it states that the total market value of a firm's securities must equal the total market value of the firm's assets. 
A) Once investors know the recap will occur,the share price will rise immediately to a level that reflects the value of the interest tax shield that the firm will receive from its recapitalization. 
B) When securities are fairly priced,the original shareholders of a firm capture the full benefit of the interest tax shield from an increase in leverage. 
C) In the presence of corporate taxes,we do not include the interest tax shield as one of the firm's assets on its market value balance sheet. 
D) We can analyze the recapitalization using the market value balance sheet;it states that the total market value of a firm's securities must equal the total market value of the firm's assets.

Question 6

The value of Shepard Industries with leverage is closest to:

Accepted Answer

A) $64 million 
B) $100 million 
C) $135 million 
D) $114 million 
A) $64 million 
B) $100 million 
C) $135 million 
D) $114 million

Question 7

Taggart Transcontinental currently has no debt and an equity cost of capital of 16%.Suppose that Taggart decides to increase its leverage and maintain a market debt-to-value ratio of 1/3.Suppose Taggart's debt cost of capital is 9% and its corporate tax rate is 35%.Assuming that Taggart's pre-tax WACC remains constant,then with the addition of leverage its effective after-tax WACC will be closest to:

Accepted Answer

A) 12.9% 
B) 13.0% 
C) 15.0% 
D) 16.0% 
A) 12.9% 
B) 13.0% 
C) 15.0% 
D) 16.0%

Question 8

Consider the following formula:
VL = VU + τcD
The term τcD represents:

Accepted Answer

A) the present value of the interest tax shield. 
B) the value of the firm with leverage. 
C) the preset value of the future interest payments. 
D) the interest tax shield each year. 
A) the present value of the interest tax shield. 
B) the value of the firm with leverage. 
C) the preset value of the future interest payments. 
D) the interest tax shield each year.

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) Aside from taxes,another important difference between debt and equity financing is that debt payments must be made to avoid bankruptcy,whereas firms have no similar obligation to pay dividends or realize capital gains. 
B) Increasing the level of debt increases the probability of bankruptcy. 
C) A firm receives a tax benefit only if it is paying taxes in the first place. 
D) To the extent that a firm has other tax shields,its taxable earnings will be increased and it will rely more heavily on the interest tax shield. 
A) Aside from taxes,another important difference between debt and equity financing is that debt payments must be made to avoid bankruptcy,whereas firms have no similar obligation to pay dividends or realize capital gains. 
B) Increasing the level of debt increases the probability of bankruptcy. 
C) A firm receives a tax benefit only if it is paying taxes in the first place. 
D) To the extent that a firm has other tax shields,its taxable earnings will be increased and it will rely more heavily on the interest tax shield.

Question 10

Use the information for the question(s)below.
LCMS Industries has $70 million in debt outstanding.The firm will pay only interest on this debt (the debt is perpetual).LCMS' marginal tax rate is 35% and the firm pays a rate of 8% interest on its debt.
-LCMS' annual interest tax shield is closest to:

Accepted Answer

A) $2.8 million 
B) $2.0 million 
C) $3.6 million 
D) $5.6 million 
A) $2.8 million 
B) $2.0 million 
C) $3.6 million 
D) $5.6 million

Question 11

Consider the following formula:
Rwacc =  
RE +  
RD -  
RDτc
The term  
RDτc represents:

Accepted Answer

A) the reduction due to the interest tax shield. 
B) the present value of the interest tax shield. 
C) the preset value of the future interest payments. 
D) the interest tax shield each year. 
A) the reduction due to the interest tax shield. 
B) the present value of the interest tax shield. 
C) the preset value of the future interest payments. 
D) the interest tax shield each year.

Question 12

Galt Industries has 125 million shares outstanding and has a marginal corporate tax rate of 35%.Galt announces that it will use $75 million in excess cash to repurchase shares.Shareholders had previously assumed that Galt would retain this excess cash permanently.The amount Galt's share price can be expected to change upon this announcement is closest to:

Accepted Answer

A) $0.21 
B) $0.24 
C) $0.36 
D) $0.39 
A) $0.21 
B) $0.24 
C) $0.36 
D) $0.39

Question 13

The interest rate tax shield for Kroger in 2005 is closest to:

Accepted Answer

A) $362 million 
B) $36 million 
C) $102 million 
D) $195 million 
A) $362 million 
B) $36 million 
C) $102 million 
D) $195 million

Question 14

Which of the following equations is INCORRECT?

Accepted Answer

A) VL = VU +   
B) VL = VU + τcD 
C) rwacc =  
RE +
  
RD -
  
RDτc 
D) rwacc =  
RE +
  
RD(1 + τc) 
A) VL = VU +   
B) VL = VU + τcD 
C) rwacc =  
RE +
  
RD -
  
RDτc 
D) rwacc =  
RE +
  
RD(1 + τc)

Question 15

The present value of LCMS' interest tax shield is closest to:

Accepted Answer

A) $45.5 million 
B) $20.0 million 
C) $24.5 million 
D) $35.0 million 
A) $45.5 million 
B) $20.0 million 
C) $24.5 million 
D) $35.0 million

Question 16

The total amount available to payout to all the investors in Kroger in 2005 is closest to:

Accepted Answer

A) $190 million 
B) $847 million 
C) $745 million 
D) $290 million 
A) $190 million 
B) $847 million 
C) $745 million 
D) $290 million

Question 17

Which of the following statements is FALSE?

Accepted Answer

A) To determine the true tax benefit of leverage,we need to evaluate the combined effect of both corporate and personal taxes. 
B) A personal tax disadvantage for debt causes the WACC to decline more slowly with leverage than it otherwise would. 
C) Personal taxes have an indirect effect on the firm's weighted average cost of capital. 
D) In the United States and many other countries,capital gains from equity have historically been taxed more heavily than interest income. 
A) To determine the true tax benefit of leverage,we need to evaluate the combined effect of both corporate and personal taxes. 
B) A personal tax disadvantage for debt causes the WACC to decline more slowly with leverage than it otherwise would. 
C) Personal taxes have an indirect effect on the firm's weighted average cost of capital. 
D) In the United States and many other countries,capital gains from equity have historically been taxed more heavily than interest income.

Question 18

After the recapitalization,the value of KD's levered equity is closest to:

Accepted Answer

A) $670 million 
B) $400 million 
C) $330 million 
D) $470 million 
A) $670 million 
B) $400 million 
C) $330 million 
D) $470 million

Question 19

Assume that investors hold Google stock in retirement accounts that are free from personal taxes.Also assume that Google's current pre-tax WACC is 14%.If Google were to issue sufficient debt at a pre-tax cost of 7% to give them a debt to value ratio of 0.5,then the Google's after-tax WACC would be closest to:

Accepted Answer

A) 10.4% 
B) 12.8% 
C) 13.0% 
D) 15.0% 
E) 16.0% 
A) 10.4% 
B) 12.8% 
C) 13.0% 
D) 15.0% 
E) 16.0%

Question 20

In 2000,assuming an average dividend payout ratio of 50%,the effective tax rate for equity holders was closest to:

Accepted Answer

A) 69% 
B) 65% 
C) 55% 
D) 30% 
A) 69% 
B) 65% 
C) 55% 
D) 30%

Exam 15: Debt and Taxes

If Rosewood had no interest expense,its net income would be closest to:

Consider the following formula: VL = VU + The term Represents:

Consider the following formula: Τ* = The term τi is:

If Flagstaff currently maintains a .5 debt to equity ratio,then the value of Flagstaff as an all equity firm would be closest to:

Which of the following statements is FALSE?

The value of Shepard Industries with leverage is closest to:

Consider the following formula: VL = VU + τcD The term τcD represents:

Which of the following statements is FALSE?

Use the information for the question(s)below. LCMS Industries has $70 million in debt outstanding.The firm will pay only interest on this debt (the debt is perpetual).LCMS' marginal tax rate is 35% and the firm pays a rate of 8% interest on its debt. -LCMS' annual interest tax shield is closest to:

Consider the following formula: Rwacc = RE + RD - RDτc The term RDτc represents:

The interest rate tax shield for Kroger in 2005 is closest to:

Which of the following equations is INCORRECT?

The present value of LCMS' interest tax shield is closest to:

The total amount available to payout to all the investors in Kroger in 2005 is closest to:

Which of the following statements is FALSE?

After the recapitalization,the value of KD's levered equity is closest to:

In 2000,assuming an average dividend payout ratio of 50%,the effective tax rate for equity holders was closest to:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

Consider the following formula: V_L = V_U + The term Represents:

Consider the following formula: Τ* = The term τ_i is:

Consider the following formula: V_L = V_U + τ_cD The term τ_cD represents:

Consider the following formula: R_wacc = R_E + R_D - R_Dτ_c The term R_Dτ_c represents: