Exam 16: Capital Structure

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. -With perfect capital markets, what is the market value of Luther's equity after the share repurchase?

To reduce agency costs, issuing debt instead of equity provides incentives for managers to run a firm efficiently because ________.

A firm requires an investment of $30,000 and borrows $7500 at 7%. If the return on equity is 18%, what is the firm's pretax WACC?

When investors use leverage in their own portfolios to adjust the leverage choice made by the firm, it is referred to as ________.

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

Which of the following is NOT one of Modigliani and Miller's set of conditions referred to as perfect capital markets?

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. -Assume that in addition to 1.25 billion common shares outstanding, Luther has stock options given to employees valued at $2 billion. The market value of Luther's non-cash assets is closest to ________.

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?

Suppose Blank Company has only one project, as forecast above, and an unlevered cost of equity of 8%. If the company borrows $10,000 at 5% to make the investment, what is the return to equity holders if demand is strong?

Which of the following statements is FALSE?

A project will give a one-time cash flow of $22,000 after one year. If the project risk requires a return of 11%, what is the levered value of the firm with perfect capital markets?

Differences in the magnitude of financial distress costs and volatility of cash flows across industries do not impact the choice of leverage.

MM Proposition I states that in a perfect capital market the total value of a firm is equal to the market value of the ________ generated by its assets.

Equity in a firm with no debt is called ________.

What are direct costs of financial distress?

Suppose Blank Company has only one project, as forecast above, and an unlevered cost of equity of 8%. If the company uses no leverage, what is expected return to equity holders?

The tradeoff theory of optimal capital structure weighs the benefits of debt against the costs of ________.

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

A firm requires an investment of $36,000 and borrows $12,000 at 9%. If the return on equity is 20%, what is the firm's pretax WACC?

Under-investment problems refers to the problem that equity holders prefer not to invest in positive-NPV projects in highly levered firms because ________.