Question 1

Equity in a firm with debt is called ________.

Accepted Answer

A) levered equity 
B) risk-free equity 
C) unlevered equity 
D) preferred equity 
A) levered equity 
B) risk-free equity 
C) unlevered equity 
D) preferred equity

Question 2

A project will give a one-time cash flow of $22,000 after one year. If the project risk requires a return of 10%, what is the levered value of the firm with perfect capital markets?

Accepted Answer

A) $20,000 
B) $16,000 
C) $24,000 
D) more information needed 
A) $20,000 
B) $16,000 
C) $24,000 
D) more information needed

Question 3

The following equation: X =   rE +   rD
Can be used to calculate all of the following EXCEPT ________.

Accepted Answer

A) the cost of capital for a firm's assets 
B) the levered cost of preferred equity 
C) the unlevered cost of equity 
D) the weighted average cost of capital 
A) the cost of capital for a firm's assets 
B) the levered cost of preferred equity 
C) the unlevered cost of equity 
D) the weighted average cost of capital

Question 4

The U in the equation above represents ________.

Accepted Answer

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

Question 5

As the level of debt increases the tax benefits of debt increase until ________.

Accepted Answer

A) interest costs exceed dividend payments 
B) tax shield benefit exceeds distress costs 
C) raw material costs exceed dividend payments 
D) employee costs exceed interest expense 
A) interest costs exceed dividend payments 
B) tax shield benefit exceeds distress costs 
C) raw material costs exceed dividend payments 
D) employee costs exceed interest expense

Question 6

A firm requires an investment of $20,000 and will return $26,500 after one year. If the firm borrows $6000 at 7%, what is the return on levered equity?

Accepted Answer

A) 35% 
B) 52% 
C) 43% 
D) 61% 
A) 35% 
B) 52% 
C) 43% 
D) 61%

Question 7

Asymmetric information implies that ________ may have better information about a firm's cash flows than other stakeholders.

Accepted Answer

A) debt holders 
B) suppliers 
C) managers 
D) creditors 
A) debt holders 
B) suppliers 
C) managers 
D) creditors

Question 8

The optimal capital structure depends on ________ such as taxes, distress costs and agency costs.

Accepted Answer

A) capital market factors 
B) market imperfections 
C) firm specific risks 
D) systematic risks 
A) capital market factors 
B) market imperfections 
C) firm specific risks 
D) systematic risks

Question 9

The presence of a large amount of debt can encourage shareholders to take excessive risk because ________.

Accepted Answer

A) equity holders are risk seeking by nature 
B) the costs of failure are borne largely by debt holders 
C) debt holders are risk seeking 
D) firm value increases with risk taking 
A) equity holders are risk seeking by nature 
B) the costs of failure are borne largely by debt holders 
C) debt holders are risk seeking 
D) firm value increases with risk taking

Question 10

A financial manager makes a choice of the amount and source of capital based on how the choice will impact the ________.

Accepted Answer

A) revenue 
B) face value of bonds 
C) depreciation 
D) firm value 
A) revenue 
B) face value of bonds 
C) depreciation 
D) firm value

Question 11

The presence of leverage can influence the behavior of the managers of a firm.

Accepted Answer

A) True 
 B)False

Question 12

Even if two firms operate in the same industry, they may prefer different choices of debt-equity ratios.

Accepted Answer

A) True 
 B)False

Question 13

A firm has a market value of equity of $40,000. It borrows $8000 at 7%. If the unlevered cost of equity is 16%, what is the firm's cost of equity capital?

Accepted Answer

A) 8.9% 
B) 21.4% 
C) 17.8% 
D) 24.9% 
A) 8.9% 
B) 21.4% 
C) 17.8% 
D) 24.9%

Question 14

What are the issues in determining the present value (PV)of financial distress?

Accepted Answer

Calculating the precise present value (P

Question 15

A bankruptcy process is complex, time-consuming, and costly. The costs of bankruptcy include ________.

Accepted Answer

A) dividend payments 
B) raw material costs 
C) costs of hiring legal experts, appraisers, and auctioneers 
D) taxes 
A) dividend payments 
B) raw material costs 
C) costs of hiring legal experts, appraisers, and auctioneers 
D) taxes

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) The relative proportions of debt, equity, and other securities that a firm has outstanding constitute its capital structure. 
B) The most common choices are financing through equity alone and financing through a combination of debt and equity. 
C) A project's net present value (NPV)represents the value to the new investors of a firm created by the project. 
D) When corporations raise funds from outside investors, they must choose which type of security to issue. 
A) The relative proportions of debt, equity, and other securities that a firm has outstanding constitute its capital structure. 
B) The most common choices are financing through equity alone and financing through a combination of debt and equity. 
C) A project's net present value (NPV)represents the value to the new investors of a firm created by the project. 
D) When corporations raise funds from outside investors, they must choose which type of security to issue.

Question 17

According to researchers Modigliani and Miller, with perfect capital markets, the total value of a firm should not depend on its capital structure.

Accepted Answer

A) True 
 B)False

Question 18

Suppose a project financed via an issue of debt requires five annual interest payments of $12 million each year. If the tax rate is 35% and the cost of debt is 5%, what is the value of the interest rate tax shield?

Accepted Answer

A) 14.55 million 
B) $21.82 million 
C) $36.37 million 
D) $18.18 million 
A) 14.55 million 
B) $21.82 million 
C) $36.37 million 
D) $18.18 million

Question 19

A firm requires an investment of $60,000 and borrows $30,000 at 9%. If the return on equity is 22% and the tax rate is 35%, what is the firm's WACC?

Accepted Answer

A) 11.1% 
B) 13.9% 
C) 16.7% 
D) 27.9% 
A) 11.1% 
B) 13.9% 
C) 16.7% 
D) 27.9%

Question 20

Which of the following statements is FALSE?

Accepted Answer

A) While debt itself may be cheap, it increases the risk and therefore the cost of capital of the firm's equity. 
B) Although debt does not have a lower cost of capital than equity, we can consider this cost in isolation. 
C) We can use MM Proposition I to derive an explicit relationship between leverage and the equity cost of capital. 
D) The total market value of the firm's securities is equal to the market value of its assets, whether the firm is unlevered or levered. 
A) While debt itself may be cheap, it increases the risk and therefore the cost of capital of the firm's equity. 
B) Although debt does not have a lower cost of capital than equity, we can consider this cost in isolation. 
C) We can use MM Proposition I to derive an explicit relationship between leverage and the equity cost of capital. 
D) The total market value of the firm's securities is equal to the market value of its assets, whether the firm is unlevered or levered.

Exam 16: Capital Structure

Equity in a firm with debt is called ________.

A project will give a one-time cash flow of $22,000 after one year. If the project risk requires a return of 10%, what is the levered value of the firm with perfect capital markets?

The following equation: X = rE + rD Can be used to calculate all of the following EXCEPT ________.

The U in the equation above represents ________.

As the level of debt increases the tax benefits of debt increase until ________.

A firm requires an investment of $20,000 and will return $26,500 after one year. If the firm borrows $6000 at 7%, what is the return on levered equity?

Asymmetric information implies that ________ may have better information about a firm's cash flows than other stakeholders.

The optimal capital structure depends on ________ such as taxes, distress costs and agency costs.

The presence of a large amount of debt can encourage shareholders to take excessive risk because ________.

A financial manager makes a choice of the amount and source of capital based on how the choice will impact the ________.

The presence of leverage can influence the behavior of the managers of a firm.

Even if two firms operate in the same industry, they may prefer different choices of debt-equity ratios.

A firm has a market value of equity of $40,000. It borrows $8000 at 7%. If the unlevered cost of equity is 16%, what is the firm's cost of equity capital?

What are the issues in determining the present value (PV)of financial distress?

A bankruptcy process is complex, time-consuming, and costly. The costs of bankruptcy include ________.

Which of the following statements is FALSE?

According to researchers Modigliani and Miller, with perfect capital markets, the total value of a firm should not depend on its capital structure.

Suppose a project financed via an issue of debt requires five annual interest payments of $12 million each year. If the tax rate is 35% and the cost of debt is 5%, what is the value of the interest rate tax shield?

A firm requires an investment of $60,000 and borrows $30,000 at 9%. If the return on equity is 22% and the tax rate is 35%, what is the firm's WACC?

Which of the following statements is FALSE?

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

The following equation: X = r_E + r_D Can be used to calculate all of the following EXCEPT ________.