Question 1

A firm requires an investment of $30,000 and borrows $20,000 at 9%. If the return on equity is 15% and the tax rate is 30%, what is the firm's WACC?

Accepted Answer

A) 9.20% 
B) 7.36% 
C) 11.04% 
D) 18.40% 
A) 9.20% 
B) 7.36% 
C) 11.04% 
D) 18.40%

Question 2

When a firm's investment decisions have different consequences for the value of equity and the value of debt, managers may take actions ________.

Accepted Answer

A) to increase debt values 
B) to decrease costs of distress 
C) that benefit shareholders at the expense of debt holders 
D) to reduce fixed costs 
A) to increase debt values 
B) to decrease costs of distress 
C) that benefit shareholders at the expense of debt holders 
D) to reduce fixed costs

Question 3

Investment cash flows are independent of financing choices in a ________.

Accepted Answer

A) market with frictions 
B) perfect capital market 
C) setting with frictions in investment returns 
D) firm with leverage 
A) market with frictions 
B) perfect capital market 
C) setting with frictions in investment returns 
D) firm with leverage

Question 4

A firm's ________ ratio is the fraction of the firm's total value that corresponds to debt.

Accepted Answer

A) debt-to-equity 
B) equity-to-debt 
C) debt-to-value 
D) liability 
A) debt-to-equity 
B) equity-to-debt 
C) debt-to-value 
D) liability

Question 5

Firms in industries such as real estate tend to have ________ distress costs because of a large proportion of tangible assets.

Accepted Answer

A) high 
B) low 
C) unexpected 
D) varying 
A) high 
B) low 
C) unexpected 
D) varying

Question 6

The E in the equation above represents ________.

Accepted Answer

A) the value of the firm's equity 
B) the value of the firm's debt 
C) the value of the firm's unlevered equity 
D) the market value of the firm's assets 
A) the value of the firm's equity 
B) the value of the firm's debt 
C) the value of the firm's unlevered equity 
D) the market value of the firm's assets

Question 7

With perfect capital markets, because different choices of capital structure offer a benefit to investors, the capital structure affects the value of a firm.

Accepted Answer

A) True 
 B)False

Question 8

What are direct costs of financial distress?

Accepted Answer

When a corporation becomes financially d

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) When a firm borrows money to repurchase shares that account for a significant percentage of its outstanding shares, the transaction is called a leveraged recapitalization. 
B) MM Proposition I applies to capital structure decisions made at any time during the life of a firm. 
C) By choosing positive-NPV projects that are worth more than their initial investment, a firm can enhance its value. 
D) The choice of capital structure does not change the value of a firm if the cost of equity is higher than the cost of debt. 
A) When a firm borrows money to repurchase shares that account for a significant percentage of its outstanding shares, the transaction is called a leveraged recapitalization. 
B) MM Proposition I applies to capital structure decisions made at any time during the life of a firm. 
C) By choosing positive-NPV projects that are worth more than their initial investment, a firm can enhance its value. 
D) The choice of capital structure does not change the value of a firm if the cost of equity is higher than the cost of debt.

Question 10

Financial managers prefer to choose the same debt level no matter which industry they operate in.

Accepted Answer

A) True 
 B)False

Question 11

A firm has a market value of equity of $30,000. It borrows $7500 at 8%. If the unlevered cost of equity is 16%, what is the firm's cost of equity capital?

Accepted Answer

A) 9.0% 
B) 18.0% 
C) 21.6% 
D) 25.2% 
A) 9.0% 
B) 18.0% 
C) 21.6% 
D) 25.2%

Question 12

Suppose a project financed via an issue of debt requires five annual interest payments of $18 million each year. If the tax rate is 35% and the cost of debt is 7%, what is the value of the interest rate tax shield?

Accepted Answer

A) $20.66 million 
B) $31.00 million 
C) $25.83 million 
D) $51.66 million 
A) $20.66 million 
B) $31.00 million 
C) $25.83 million 
D) $51.66 million

Question 13

What is the capital structure of a firm?

Accepted Answer

The relative proport

Question 14

Which of the following does a firm consider in the choice of securities issued?

Accepted Answer

A) the tax consequences of the chosen security 
B) the transactions costs of the chosen security 
C) whether the chosen security will have a fair price in the market 
D) All of the above are considered. 
A) the tax consequences of the chosen security 
B) the transactions costs of the chosen security 
C) whether the chosen security will have a fair price in the market 
D) All of the above are considered.

Question 15

What are indirect costs of financial distress?

Accepted Answer

Indirect costs of financial di

Question 16

The use of leverage as a way to signal ________ information to investors is known as the signaling theory of debt.

Accepted Answer

A) good 
B) bad 
C) random 
D) none of the above 
A) good 
B) bad 
C) random 
D) none of the above

Question 17

Managers should make use of the interest tax shield if a firm has ________.

Accepted Answer

A) consistent taxable income 
B) volatility in taxable income 
C) consistent dividend payments 
D) low tax rates 
A) consistent taxable income 
B) volatility in taxable income 
C) consistent dividend payments 
D) low tax rates

Question 18

Suppose Blank Company has only one project, as forecast above, and an unlevered cost of equity of 8%. What is the value of the company if the demand is as expected?

Accepted Answer

A) $23,148.15 
B) $32,407.40 
C) $41,666.67 
D) Cannot be determined with the information given. 
A) $23,148.15 
B) $32,407.40 
C) $41,666.67 
D) Cannot be determined with the information given.

Question 19

Use the information for the question(s)below.
Luther is a successful logistical services firm that currently has $5 billion in cash. Luther has decided to use this cash to repurchase shares from its investors and has already announced the stock repurchase plan. Currently Luther is an all-equity firm with 1.25 billion shares outstanding. Luther's shares are currently trading at $20 per share.
-After the repurchase, how many shares will Luther have outstanding?

Accepted Answer

A) 0.75 billion 
B) 1.0 billion 
C) 1.1 billion 
D) 1.2 billion 
A) 0.75 billion 
B) 1.0 billion 
C) 1.1 billion 
D) 1.2 billion

Question 20

Use the information for the question(s)below.
Consider two firms, Firm X and Firm Y, that have identical assets that generate identical cash flows. Firm Y is an all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. Firm X has 2 million shares outstanding and $12 million in debt at an interest rate of 5%.
-Assume that MM's perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as Firm X. You have $5,000 of your own money to invest and you plan on buying Firm X stock. Using homemade (un)leverage you invest enough at the risk-free rate so that the payoff of your account will be the same as a $5,000 investment in Firm Y stock. The number of shares of Firm X stock you purchased is closest to ________.

Accepted Answer

A) 100 
B) 417 
C) 1,650 
D) 825 
A) 100 
B) 417 
C) 1,650 
D) 825

Exam 16: Capital Structure

A firm requires an investment of $30,000 and borrows $20,000 at 9%. If the return on equity is 15% and the tax rate is 30%, what is the firm's WACC?

When a firm's investment decisions have different consequences for the value of equity and the value of debt, managers may take actions ________.

Investment cash flows are independent of financing choices in a ________.

A firm's ________ ratio is the fraction of the firm's total value that corresponds to debt.

Firms in industries such as real estate tend to have ________ distress costs because of a large proportion of tangible assets.

The E in the equation above represents ________.

With perfect capital markets, because different choices of capital structure offer a benefit to investors, the capital structure affects the value of a firm.

What are direct costs of financial distress?

Which of the following statements is FALSE?

Financial managers prefer to choose the same debt level no matter which industry they operate in.

A firm has a market value of equity of $30,000. It borrows $7500 at 8%. If the unlevered cost of equity is 16%, what is the firm's cost of equity capital?

Suppose a project financed via an issue of debt requires five annual interest payments of $18 million each year. If the tax rate is 35% and the cost of debt is 7%, what is the value of the interest rate tax shield?

What is the capital structure of a firm?

Which of the following does a firm consider in the choice of securities issued?

What are indirect costs of financial distress?

The use of leverage as a way to signal ________ information to investors is known as the signaling theory of debt.

Managers should make use of the interest tax shield if a firm has ________.

Suppose Blank Company has only one project, as forecast above, and an unlevered cost of equity of 8%. What is the value of the company if the demand is as expected?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters