Exam 16: Capital Structure

Use next year's Cash Flow Forecast for Blank Company to answer the question(s) below. -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?

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, how much do you need to invest 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?

Equity in a firm with debt is called ________.

Equity in a firm with no debt is called unlevered equity.

What effect does debt have on a firm's weighted average cost of capital?

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?

Which of the following statements is FALSE?

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

What are the issues in determining the optimal leverage for a firm?

The Tradeoff Theory suggests that ________.

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

The relative proportions of debt, equity, and other securities that a firm has outstanding constitute its ________.

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

Managerial entrenchment means that managers ________ and run the firm for their own best interests.

Managers should consider ________ for external financing when agency costs are significant.

In general, the gain to investors from the tax deductibility of interest payments is referred to as the interest rate tax shield.

Which of the following statements is FALSE?

The probability of financial distress depends on the ________.

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?

Which of the following statements is FALSE?