Question 1

The income that would be available to equity holders in 2006 if Kroger was not levered is closest to:

Accepted Answer

A) $1525 million 
B) $2035 million 
C) $1500 million 
D) $1325 million 
A) $1525 million 
B) $2035 million 
C) $1500 million 
D) $1325 million

Question 2

In 2005,the effective tax rate for debt holders was closest to:

Accepted Answer

A) 58% 
B) 35% 
C) 40% 
D) 65% 
A) 58% 
B) 35% 
C) 40% 
D) 65%

Question 3

Nielson Motors has no debt,and maintains a policy of holding $80 million in excess cash reserves,invested in risk free treasury securities currently yielding 3%.If Nielson is in the 35% marginal tax bracket,the cost of permanently maintaining this $80 million reserve is closest to:

Accepted Answer

A) $0.85 million 
B) $1.6 million 
C) $24.0 million 
D) $28.0 million 
A) $0.85 million 
B) $1.6 million 
C) $24.0 million 
D) $28.0 million

Question 4

IF FBNA increases leverage so that its interest expense rises by $1 million,then the amount its net income will change is closest to:

Accepted Answer

A) -$400,000 
B) -$600,000 
C) $400,000 
D) $600,000 
A) -$400,000 
B) -$600,000 
C) $400,000 
D) $600,000

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) The higher the firm's leverage,the more the firm exploits the tax advantage of debt,and the lower its WACC. 
B) Corporate taxes lower the effective cost of debt financing,which translates into a reduction in the weighted average cost of capital. 
C) Because the firm's free cash flow is computed without considering the firm's leverage,we account for the benefit of the interest tax shield by calculating the WACC using the before tax cost of debt. 
D) The reduction in the WACC increases with the amount of debt financing. 
A) The higher the firm's leverage,the more the firm exploits the tax advantage of debt,and the lower its WACC. 
B) Corporate taxes lower the effective cost of debt financing,which translates into a reduction in the weighted average cost of capital. 
C) Because the firm's free cash flow is computed without considering the firm's leverage,we account for the benefit of the interest tax shield by calculating the WACC using the before tax cost of debt. 
D) The reduction in the WACC increases with the amount of debt financing.

Question 6

The preset value of KD's interest tax shield is closest to:

Accepted Answer

A) $130 million 
B) $200 million 
C) $400 million 
D) $70 million 
A) $130 million 
B) $200 million 
C) $400 million 
D) $70 million

Question 7

If Flagstaff currently maintains a debt to equity ratio of 1,then the value of Flagstaff as an all equity firm would be closest to:

Accepted Answer

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

Question 8

Assume that investors hold Google stock in retirement accounts that are free from personal taxes.If Google were to issue sufficient debt to reduce its taxes by $600 million per year permanently,then the amount that Google needs to borrow is closest to:

Accepted Answer

A) $14.25 billion 
B) $22.00 billion 
C) $24.50 billion 
D) $40.75 billion 
A) $14.25 billion 
B) $22.00 billion 
C) $24.50 billion 
D) $40.75 billion

Question 9

The total amount available to payout to all the investors in Kroger in 2006 is closest to:

Accepted Answer

A) $990 million 
B) $1525 million 
C) $1500 million 
D) $2035 million 
A) $990 million 
B) $1525 million 
C) $1500 million 
D) $2035 million

Question 10

Which of the following statements is FALSE?

Accepted Answer

A) The value of a firm is equal to the amount of money the firm can raise by issuing securities. 
B) By reducing a firm's corporate tax liability,debt allows the firm to pay more of its cash flows to investors. 
C) Equity investors must pay taxes on dividends but not capital gains. 
D) For individuals,interest payments received from debt are taxed as income. 
A) The value of a firm is equal to the amount of money the firm can raise by issuing securities. 
B) By reducing a firm's corporate tax liability,debt allows the firm to pay more of its cash flows to investors. 
C) Equity investors must pay taxes on dividends but not capital gains. 
D) For individuals,interest payments received from debt are taxed as income.

Question 11

Use the information for the question(s)below.
Rosewood Industries has EBIT of $450 million,interest expense of $175 million,and a corporate tax rate of 35%.
-Rosewood's net income is closest to:

Accepted Answer

A) $450 million 
B) $180 million 
C) $290 million 
D) $95 million 
A) $450 million 
B) $180 million 
C) $290 million 
D) $95 million

Question 12

Which of the following statements regarding recapitalizations is FALSE?

Accepted Answer

A) With a recapitalization,even though leverage reduces the total value of equity,shareholders capture the benefits of the interest tax shield up front. 
B) The share price always rises after the completion of the recapitalization. 
C) Leveraged recaps were especially popular in the mid- to late-1980s,when many firms found that these transactions could reduce their tax payments. 
D) When a firm makes a significant change to its capital structure,the transaction is called a recapitalization. 
A) With a recapitalization,even though leverage reduces the total value of equity,shareholders capture the benefits of the interest tax shield up front. 
B) The share price always rises after the completion of the recapitalization. 
C) Leveraged recaps were especially popular in the mid- to late-1980s,when many firms found that these transactions could reduce their tax payments. 
D) When a firm makes a significant change to its capital structure,the transaction is called a recapitalization.

Question 13

Use the information for the question(s)below.
Flagstaff Enterprises expected to have free cash flow in the coming year of $8 million,and this free cash flow is expected to grow at a rate of 3% per year thereafter.Flagstaff has an equity cost of capital of 13%,a debt cost of capital of 7%,and it is in the 35% corporate tax bracket.
-If Flagstaff maintains a .5 debt to equity ratio,then Flagstaff's pre-tax WACC is closest to:

Accepted Answer

A) 10.5% 
B) 11.0% 
C) 9.0% 
D) 10.0% 
A) 10.5% 
B) 11.0% 
C) 9.0% 
D) 10.0%

Question 14

Use the information for the question(s)below.
KD Industries has 30 million shares outstanding with a market price of $20 per share and no debt.KD has had consistently stable earnings,and pays a 35% tax rate.Management plans to borrow $200 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares.
-Assume the following tax schedule:
Personal Tax Rates
   
Considering the effect of personal taxes,calculate the PV of the interest tax shield provided by KD's recapitalization in 2005.

Accepted Answer

The average personal tax rate

Question 15

Which of the following statements is FALSE?

Accepted Answer

A) Even though firms have not issued new equity,the market value of equity has risen over time as firms have grown. 
B) While firms seem to prefer debt when raising external funds,not all investment is externally funded. 
C) To receive the full tax benefits of leverage a firm needs to use 100% debt financing. 
D) If bankruptcy is costly,these costs might offset the tax advantages of debt financing. 
A) Even though firms have not issued new equity,the market value of equity has risen over time as firms have grown. 
B) While firms seem to prefer debt when raising external funds,not all investment is externally funded. 
C) To receive the full tax benefits of leverage a firm needs to use 100% debt financing. 
D) If bankruptcy is costly,these costs might offset the tax advantages of debt financing.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) Personal taxes have the potential to offset some of the corporate tax benefits of leverage. 
B) The actual interest tax shield depends on the reduction in the total taxes (both corporate and personal)that are paid. 
C) The amount of money an investor will pay for a security ultimately depends on the benefits the investor will receive-namely,the cash flows the investor will receive before all taxes have been paid. 
D) Just like corporate taxes,personal taxes reduce the cash flows to investors and diminish firm value. 
A) Personal taxes have the potential to offset some of the corporate tax benefits of leverage. 
B) The actual interest tax shield depends on the reduction in the total taxes (both corporate and personal)that are paid. 
C) The amount of money an investor will pay for a security ultimately depends on the benefits the investor will receive-namely,the cash flows the investor will receive before all taxes have been paid. 
D) Just like corporate taxes,personal taxes reduce the cash flows to investors and diminish firm value.

Question 17

If Flagstaff maintains a debt to equity ratio of 1,then Flagstaff's pre-tax WACC is closest to:

Accepted Answer

A) 11.0% 
B) 10.5% 
C) 10.0% 
D) 9.0% 
A) 11.0% 
B) 10.5% 
C) 10.0% 
D) 9.0%

Question 18

Assume that investors hold Google stock in retirement accounts that are free from personal taxes.If Google were to issue sufficient debt to reduce its taxes by $600 million per year permanently,then the value that would be created is closest to:

Accepted Answer

A) $6.4 billion 
B) $8.6 billion 
C) $9.8 billion 
D) $14.3 billion 
A) $6.4 billion 
B) $8.6 billion 
C) $9.8 billion 
D) $14.3 billion

Question 19

Assuming that the risk of the tax shield is only 6% even though the debt pays 8%,then the present value of LCMS' interest tax shield is closest to:

Accepted Answer

A) $24.5 million 
B) $18 million 
C) $33.0 million 
D) $20.0 million 
A) $24.5 million 
B) $18 million 
C) $33.0 million 
D) $20.0 million

Question 20

KAHR Incorporated will have EBIT this coming year of $45 million.It will also spend $18 million on total capital expenditures,increases its net working capital by $7,and have $9 million in depreciation expenses.KAHR is currently an all-equity firm with a corporate tax rate of 35% and a cost of capital of 10%.If the interest rate on new KAHR debt is 8%,how much should KAHR borrow today if they want to maximize there interest tax shield?

Accepted Answer

Amount to

Exam 15: Debt and Taxes

The income that would be available to equity holders in 2006 if Kroger was not levered is closest to:

In 2005,the effective tax rate for debt holders was closest to:

Nielson Motors has no debt,and maintains a policy of holding $80 million in excess cash reserves,invested in risk free treasury securities currently yielding 3%.If Nielson is in the 35% marginal tax bracket,the cost of permanently maintaining this $80 million reserve is closest to:

IF FBNA increases leverage so that its interest expense rises by $1 million,then the amount its net income will change is closest to:

Which of the following statements is FALSE?

The preset value of KD's interest tax shield is closest to:

If Flagstaff currently maintains a debt to equity ratio of 1,then the value of Flagstaff as an all equity firm would be closest to:

Assume that investors hold Google stock in retirement accounts that are free from personal taxes.If Google were to issue sufficient debt to reduce its taxes by $600 million per year permanently,then the amount that Google needs to borrow is closest to:

The total amount available to payout to all the investors in Kroger in 2006 is closest to:

Which of the following statements is FALSE?

Use the information for the question(s)below. Rosewood Industries has EBIT of $450 million,interest expense of $175 million,and a corporate tax rate of 35%. -Rosewood's net income is closest to:

Which of the following statements regarding recapitalizations is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

If Flagstaff maintains a debt to equity ratio of 1,then Flagstaff's pre-tax WACC is closest to:

Assume that investors hold Google stock in retirement accounts that are free from personal taxes.If Google were to issue sufficient debt to reduce its taxes by $600 million per year permanently,then the value that would be created is closest to:

Assuming that the risk of the tax shield is only 6% even though the debt pays 8%,then the present value of LCMS' interest tax shield is 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

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