Question 1

Which of the following statements is FALSE?

Accepted Answer

A) Unlike taxes on capital gains or interest income,which are paid annually,taxes on dividends are paid only at the time the investor sells the stock. 
B) Deferring the payment of capital gains taxes lowers the present value of the taxes,which can be interpreted as a lower effective capital gains tax rate. 
C) Investors with longer holding periods or with accrued losses face a lower tax rate on equity income,decreasing the effective tax advantage of debt. 
D) Investors with accrued losses that they can use to offset gains face a zero effective capital gains tax rate. 
A) Unlike taxes on capital gains or interest income,which are paid annually,taxes on dividends are paid only at the time the investor sells the stock. 
B) Deferring the payment of capital gains taxes lowers the present value of the taxes,which can be interpreted as a lower effective capital gains tax rate. 
C) Investors with longer holding periods or with accrued losses face a lower tax rate on equity income,decreasing the effective tax advantage of debt. 
D) Investors with accrued losses that they can use to offset gains face a zero effective capital gains tax rate.

Question 2

Which of the following statements is FALSE?

Accepted Answer

A) If there is uncertainty regarding EBIT,then with a higher interest expense there is a greater risk that interest will exceed EBIT. 
B) Even for a firm with positive earnings,growth will affect the optimal leverage ratio. 
C) From a tax perspective,the firm's optimal level of debt is proportional to its current earnings. 
D) The optimal proportion of debt in the firm's capital structure will be higher,the higher the firm's growth rate. 
A) If there is uncertainty regarding EBIT,then with a higher interest expense there is a greater risk that interest will exceed EBIT. 
B) Even for a firm with positive earnings,growth will affect the optimal leverage ratio. 
C) From a tax perspective,the firm's optimal level of debt is proportional to its current earnings. 
D) The optimal proportion of debt in the firm's capital structure will be higher,the higher the firm's growth rate.

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) To determine the benefit of leverage for the value of the firm,we must compute the present value of the stream of future interest tax shields the firm will receive. 
B) Because the cash flows of the levered firm are equal to the sum of the cash flows from the unlevered firm plus the interest tax shield,by the Law of One Price the same must be true for the present values of these cash flows. 
C) By increasing the amount paid to debt holders through interest payments,the amount of the pre-tax cash flows that must be paid as taxes increases. 
D) When a firm uses debt,the interest tax shield provides a corporate tax benefit each year. 
A) To determine the benefit of leverage for the value of the firm,we must compute the present value of the stream of future interest tax shields the firm will receive. 
B) Because the cash flows of the levered firm are equal to the sum of the cash flows from the unlevered firm plus the interest tax shield,by the Law of One Price the same must be true for the present values of these cash flows. 
C) By increasing the amount paid to debt holders through interest payments,the amount of the pre-tax cash flows that must be paid as taxes increases. 
D) When a firm uses debt,the interest tax shield provides a corporate tax benefit each year.

Question 4

Assume that five years have passed since Wyatt issued this debt.While tax rates have remained at 40%,interest rates have dropped so that Wyatt's current cost of debt capital is now only 4%.Wyatt's annual interest tax shield is now closest to:

Accepted Answer

A) $2.8 million 
B) $4.2 million 
C) $40.0 million 
D) $60.0 million 
A) $2.8 million 
B) $4.2 million 
C) $40.0 million 
D) $60.0 million

Question 5

Consider the following formula:
Rwacc =  
RE +  
RD -  
RDτc
The terms  
RE +  
RD represent:

Accepted Answer

A) the after-tax WACC. 
B) the reduction due to equity financing. 
C) the before-tax WACC. 
D) the reduction due to the interest tax shield. 
A) the after-tax WACC. 
B) the reduction due to equity financing. 
C) the before-tax WACC. 
D) the reduction due to the interest tax shield.

Question 6

The income that would be available to equity holders in 2005 if Kroger was not levered is closest to:

Accepted Answer

A) $290 million 
B) $745 million 
C) $847 million 
D) $550 million 
A) $290 million 
B) $745 million 
C) $847 million 
D) $550 million

Question 7

The present value of Wyatt's annual interest tax shield is closest to:

Accepted Answer

A) $4.2 million 
B) $7.0 million 
C) $40 million 
D) $60 million 
A) $4.2 million 
B) $7.0 million 
C) $40 million 
D) $60 million

Question 8

Use the table for the question(s)below.
Consider the following income statement for Kroger Inc.(all figures in $ Millions):  
-The interest rate tax shield for Kroger in 2006 is closest to:

Accepted Answer

A) $187 million 
B) $332 million 
C) $534 million 
D) $179 million 
A) $187 million 
B) $332 million 
C) $534 million 
D) $179 million

Question 9

Use the information for the question(s)below.
Fly by Night Aviation (FBNA)expects to have net income next year of $24 million and interest expense of $3 million.FBNA's marginal corporate tax rate is 40%.
-FBNA's EBIT is closest to:

Accepted Answer

A) $43 million 
B) $40 Million 
C) $45 million 
D) $60 million 
A) $43 million 
B) $40 Million 
C) $45 million 
D) $60 million

Question 10

If Flagstaff currently maintains a debt to equity ratio of 1,then the value of Flagstaff's interest tax shield is closest to:

Accepted Answer

A) $10 million 
B) $18 million 
C) $11 million 
D) $24 million 
A) $10 million 
B) $18 million 
C) $11 million 
D) $24 million

Question 11

Which of the following statements is FALSE?

Accepted Answer

A) Given a 35% corporate tax rate,for every $1 in new permanent debt that the firm issues,the value of the firm increases by $0.65. 
B) The firm's marginal tax rate may fluctuate due to changes in the tax code and changes in the firm's income bracket. 
C) Many large firms have a policy of maintaining a certain amount of debt on their balance sheets. 
D) Typically,the level of future interest payments varies due to changes the firm makes in the amount of debt outstanding,changes in the interest rate on that debt,and the risk that the firm may default and fail to make an interest payment. 
A) Given a 35% corporate tax rate,for every $1 in new permanent debt that the firm issues,the value of the firm increases by $0.65. 
B) The firm's marginal tax rate may fluctuate due to changes in the tax code and changes in the firm's income bracket. 
C) Many large firms have a policy of maintaining a certain amount of debt on their balance sheets. 
D) Typically,the level of future interest payments varies due to changes the firm makes in the amount of debt outstanding,changes in the interest rate on that debt,and the risk that the firm may default and fail to make an interest payment.

Question 12

The amount of Rosewood's interest tax shield is closest to:

Accepted Answer

A) $115 million 
B) $290 million 
C) $175 million 
D) $60 million 
A) $115 million 
B) $290 million 
C) $175 million 
D) $60 million

Question 13

Rearden Metal currently has no debt and an equity cost of capital of 14%.Suppose that Rearden decides to increase its leverage and maintain a market debt-to-value ratio of 1/2.Suppose Rearden's debt cost of capital is 8% and its corporate tax rate is 40%.Assuming that Rearden's pre-tax WACC remains constant,then with the addition of leverage its effective after-tax WACC will be closest to:

Accepted Answer

A) 10.8% 
B) 12.4% 
C) 12.8% 
D) 13.4% 
A) 10.8% 
B) 12.4% 
C) 12.8% 
D) 13.4%

Question 14

The total of Rosewood's net income and interest payments is closest to:

Accepted Answer

A) $270 million 
B) $355 million 
C) $290 million 
D) $450 million 
A) $270 million 
B) $355 million 
C) $290 million 
D) $450 million

Question 15

Assume that investors in Google pay a 15% tax rate on income from equity and a 35% tax rate on interest income.If Google were to issue sufficient debt to reduce its taxes by $1 billion per year permanently,then the effective tax advantage of this debt would be closest to:

Accepted Answer

A) 10% 
B) 15% 
C) 25% 
D) 30% 
A) 10% 
B) 15% 
C) 25% 
D) 30%

Exam 15: Debt and Taxes

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Assume that five years have passed since Wyatt issued this debt.While tax rates have remained at 40%,interest rates have dropped so that Wyatt's current cost of debt capital is now only 4%.Wyatt's annual interest tax shield is now closest to:

Consider the following formula: Rwacc = RE + RD - RDτc The terms RE + RD represent:

The income that would be available to equity holders in 2005 if Kroger was not levered is closest to:

The present value of Wyatt's annual interest tax shield is closest to:

Use the table for the question(s)below. Consider the following income statement for Kroger Inc.(all figures in $ Millions): -The interest rate tax shield for Kroger in 2006 is closest to:

Use the information for the question(s)below. Fly by Night Aviation (FBNA)expects to have net income next year of $24 million and interest expense of $3 million.FBNA's marginal corporate tax rate is 40%. -FBNA's EBIT is closest to:

If Flagstaff currently maintains a debt to equity ratio of 1,then the value of Flagstaff's interest tax shield is closest to:

Which of the following statements is FALSE?

The amount of Rosewood's interest tax shield is closest to:

The total of Rosewood's net income and interest payments is closest to:

Assume that investors in Google pay a 15% tax rate on income from equity and a 35% tax rate on interest income.If Google were to issue sufficient debt to reduce its taxes by $1 billion per year permanently,then the effective tax advantage of this debt would be 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: R_wacc = R_E + R_D - R_Dτ_c The terms R_E + R_D represent: