羅斯公司理財(cái)題庫(kù)cha16

羅斯公司理財(cái)題庫(kù)cha16羅斯公司理財(cái)題庫(kù)cha16羅斯公司理財(cái)題庫(kù)cha16xxx公司羅斯公司理財(cái)題庫(kù)cha16文件編號(hào)：文件日期：修訂次數(shù)：第1.0次更改批準(zhǔn)審核制定方案設(shè)計(jì)，管理制度Chapter16CapitalStructure:BasicConcepts

MultipleChoiceQuestions

1.

Theuseofpersonalborrowingtochangetheoverallamountoffinancialleveragetowhichanindividualisexposediscalled:

A.

homemadeleverage.

B.

dividendrecapture.

C.

theweightedaveragecostofcapital.

D.

privatedebtplacement.

E.

personaloffset.

2.

Thepropositionthatthevalueofthefirmisindependentofitscapitalstructureiscalled:

A.

thecapitalassetpricingmodel.

B.

MMPropositionI.

C.

MMPropositionII.

D.

thelawofoneprice.

E.

theefficientmarketshypothesis.

3.

Thepropositionthatthecostofequityisapositivelinearfunctionofcapitalstructureiscalled:

A.

thecapitalassetpricingmodel.

B.

MMPropositionI.

C.

MMPropositionII.

D.

thelawofoneprice.

E.

theefficientmarketshypothesis.

4.

Thetaxsavingsofthefirmderivedfromthedeductibilityofinterestexpenseiscalledthe:

A.

interesttaxshield.

B.

depreciablebasis.

C.

financingumbrella.

D.

currentyield.

E.

tax-losscarryforwardsavings.

5.

Theunleveredcostofcapitalis:

A.

thecostofcapitalforafirmwithnoequityinitscapitalstructure.

B.

thecostofcapitalforafirmwithnodebtinitscapitalstructure.

C.

theinteresttaxshieldtimespretaxnetincome.

D.

thecostofpreferredstockforafirmwithequalpartsdebtandcommonstockinitscapitalstructure.

E.

equaltotheprofitmarginforafirmwithsomedebtinitscapitalstructure.

6.

Thecostofcapitalforafirm,rWACC,inazerotaxenvironmentis:

A.

equaltotheexpectedearningsdividedbymarketvalueoftheunleveredfirm.

B.

equaltotherateofreturnforthatbusinessriskclass.

C.

equaltotheoverallrateofreturnrequiredontheleveredfirm.

D.

isconstantregardlessoftheamountofleverage.

E.

Alloftheabove.

7.

Thedifferencebetweenamarketvaluebalancesheetandabookvaluebalancesheetisthatamarketvaluebalancesheet:

A.

placesassetsontherighthandside.

B.

placesliabilitiesonthelefthandside.

C.

doesnotequatetherighthandwiththelefthandside.

D.

listsitemsintermsofmarketvalues,nothistoricalcosts.

E.

usesthemarketrateofreturn.

8.

Thefirm'scapitalstructurerefersto:

A.

thewayafirminvestsitsassets.

B.

theamountofcapitalinthefirm.

C.

theamountofdividendsafirmpays.

D.

themixofdebtandequityusedtofinancethefirm'sassets.

E.

howmuchcashthefirmholds.

9.

Ageneralruleformanagerstofollowistosetthefirm'scapitalstructuresuchthat:

A.

thefirm'svalueisminimized.

B.

thefirm'svalueismaximized.

C.

thefirm'sbondholdersaremadewelloff.

D.

thefirmssuppliersofrawmaterialsaresatisfied.

E.

thefirmsdividendpayoutismaximized.

10.

Aleveredfirmisacompanythathas:

A.

AccountsPayableastheonlyliabilityonthebalancesheet.

B.

somedebtinthecapitalstructure.

C.

allequityinthecapitalstructure.

D.

Alloftheabove.

E.

Noneoftheabove.

11.

Amanagershouldattempttomaximizethevalueofthefirmby:

A.

changingthecapitalstructureifandonlyifthevalueofthefirmincreases.

B.

changingthecapitalstructureifandonlyifthevalueofthefirmincreasestothebenefitofinsidemanagement.

C.

changingthecapitalstructureifandonlyifthevalueofthefirmincreasesonlytothebenefitsofthedebtholders.

D.

changingthecapitalstructureifandonlyifthevalueofthefirmincreasesalthoughitdecreasesthestockholders'value.

E.

changingthecapitalstructureifandonlyifthevalueofthefirmincreasesandstockholderwealthisconstant.

12.

Theeffectoffinancialleveragedependsontheoperatingearningsofthecompany.Whichofthefollowingisnottrue

A.

Belowtheindifferenceorbreak-evenpointinEBITthenon-leveredstructureissuperior.

B.

FinancialleverageincreasestheslopeoftheEPSline.

C.

Abovetheindifferenceorbreak-evenpointtheincreaseinEPSforallequitystructuresislessthandebt-equitystructures.

D.

Abovetheindifferenceorbreak-evenpointtheincreaseinEPSforallequitystructuresisgreaterthandebt-equitystructures.

E.

Therateofreturnonoperatingassetsisunaffectedbyleverage.

13.

TheModigliani-MillerPropositionIwithouttaxesstates:

A.

afirmcannotchangethetotalvalueofitsoutstandingsecuritiesbychangingitscapitalstructureproportions.

B.

whennewprojectsareaddedtothefirmthefirmvalueisthesumoftheoldvalueplusthenew.

C.

managerscanmakecorrectcorporatedecisionsthatwillsatisfyallshareholdersiftheyselectprojectsthatmaximizevalue.

D.

thedeterminationofvaluemustconsiderthetimingandriskofthecashflows.

E.

Noneoftheabove.

14.

MMPropositionIwithouttaxesisusedtoillustrate:

A.

thevalueofanunleveredfirmequalsthatofaleveredfirm.

B.

thatonecapitalstructureisasgoodasanother.

C.

leveragedoesnotaffectthevalueofthefirm.

D.

capitalstructurechangeshavenoeffectonstockholders'welfare.

E.

Alloftheabove.

15.

AkeyassumptionofMM'sPropositionIwithouttaxesis:

A.

thatfinancialleverageincreasesrisk.

B.

thatindividualscanborrowontheirownaccountatrateslessthanthefirm.

C.

thatindividualsmustbeabletoborrowontheirownaccountatratesequaltothefirm.

D.

managersareactingtomaximizethevalueofthefirm.

E.

Alloftheabove.

16.

InanEPS-EBIgraphicalrelationship,theslopeofthedebtrayissteeperthantheequityray.Thedebtrayhasalowerinterceptbecause:

A.

moresharesareoutstandingforthesamelevelofEBI.

B.

thebreak-evenpointishigherwithdebt.

C.

afixedinterestchargemustbepaidevenatlowearnings.

D.

theamountofinterestpersharehasonlyapositiveeffectontheintercept.

E.

thehighertheinterestratethegreatertheslope.

17.

InanEPS-EBIgraphicalrelationship,thedebtrayandequityraycross.Atthispointtheequityanddebtare:

A.

equivalentwithrespecttoEPSbutaboveandbelowthispointequityisalwayssuperior.

B.

atbreakeveninEPSbutabovethispointdebtincreasesEPSvialeverageanddecreasesEPSbelowthispoint.

C.

equalbutawayfrombreakevenequityisbetterasfewersharesareoutstanding.

D.

atbreakevenandMMPropositionIIstatesthatdebtisthebetterchoice.

E.

atbreakevenanddebtisthebetterchoicebelowbreakevenbecausesmallpaymentscanbemade.

18.

Whencomparingleveredvs.unleveredcapitalstructures,leverageworkstoincreaseEPSforhighlevelsofEBITbecause:

A.

interestpaymentsonthedebtvarywithEBITlevels.

B.

interestpaymentsonthedebtstayfixed,leavinglessincometobedistributedoverlessshares.

C.

interestpaymentsonthedebtstayfixed,leavingmoreincometobedistributedoverlessshares.

D.

interestpaymentsonthedebtstayfixed,leavinglessincometobedistributedovermoreshares.

E.

interestpaymentsonthedebtstayfixed,leavingmoreincometobedistributedovermoreshares.

19.

Financialleverageimpactstheperformanceofthefirmby:

A.

maintainingthesamelevelofvolatilityofthefirm'sEBIT.

B.

decreasingthevolatilityofthefirm'sEBIT.

C.

decreasingthevolatilityofthefirm'snetincome.

D.

increasingthevolatilityofthefirm'snetincome.

E.

Noneoftheabove.

20.

Theincreaseinrisktoequityholderswhenfinancialleverageisintroducedisevidencedby:

A.

higherEPSasEBITincreases.

B.

ahighervariabilityofEPSwithdebtthanallequity.

C.

increaseduseofhomemadeleverage.

D.

equivalencevaluebetweenleveredandunleveredfirmsinthepresenceoftaxes.

E.

Noneoftheabove.

21.

ThereasonthatMMPropositionIdoesnotholdinthepresenceofcorporatetaxationisbecause:

A.

leveredfirmspaylesstaxescomparedwithidenticalunleveredfirms.

B.

bondholdersrequirehigherratesofreturncomparedwithstockholders.

C.

earningspersharearenolongerrelevantwithtaxes.

D.

dividendsarenolongerrelevantwithtaxes.

E.

Alloftheabove.

22.

MMPropositionIwithcorporatetaxesstatesthat:

A.

capitalstructurecanaffectfirmvalue.

B.

byraisingthedebt-to-equityratio,thefirmcanloweritstaxesandtherebyincreaseitstotalvalue.

C.

firmvalueismaximizedatanalldebtcapitalstructure.

D.

Alloftheabove.

E.

Noneoftheabove.

23.

Thechangeinfirmvalueinthepresenceofcorporatetaxesonlyis:

A.

positiveasequityholdersfacealowereffectivetaxrate.

B.

positiveasequityholdersgainthetaxshieldonthedebtinterest.

C.

negativebecauseoftheincreasedriskofdefaultandfewersharesoutstanding.

D.

negativebecauseofareductionofequityoutstanding.

E.

Noneoftheabove.

24.

Afirmshouldselectthecapitalstructurewhich:

A.

producesthehighestcostofcapital.

B.

maximizesthevalueofthefirm.

C.

minimizestaxes.

D.

isfullyunlevered.

E.

hasnodebt.

25.

Inaworldofnocorporatetaxesiftheuseofleveragedoesnotchangethevalueoftheleveredfirmrelativetotheunleveredfirmisknownas:

A.

MMPropositionIIIthatthecostofstockislessthanthecostofdebt.

B.

MMPropositionIthatleverageisinvarianttomarketvalue.

C.

MMPropositionIIthatthecostofequityisalwaysconstant.

D.

MMPropositionIthatthemarketvalueofthefirmisinvarianttothecapitalstructure.

E.

MMPropositionIIIthatthereisnoriskassociatedwithleverageinanotaxworld.

26.

BryaninvestedinBryco,Inc.stockwhenthefirmwasfinancedsolelywithequity.Thefirmisnowutilizingdebtinitscapitalstructure.Tounleverhisposition,Bryanneedsto:

A.

borrowsomemoneyandpurchaseadditionalsharesofBrycostock.

B.

maintainhiscurrentpositionasthedebtofthefirmdidnotaffecthispersonalleverageposition.

C.

sellsomesharesofBrycostockandholdtheproceedsincash.

D.

sellsomesharesofBrycostockandloanitoutsuchthathecreatesapersonaldebt-equityratioequaltothatofthefirm.

E.

createapersonaldebt-equityratiothatisequaltoexactly50%ofthedebt-equityratioofthefirm.

27.

Thecapitalstructurechosenbyafirmdoesn'treallymatterbecauseof:

A.

taxes.

B.

theinteresttaxshield.

C.

therelationshipbetweendividendsandearningspershare.

D.

theeffectsofleverageonthecostofequity.

E.

homemadeleverage.

28.

MMPropositionIwithnotaxsupportstheargumentthat:

A.

businessriskdeterminesthereturnonassets.

B.

thecostofequityrisesasleveragerises.

C.

itiscompletelyirrelevanthowafirmarrangesitsfinances.

D.

afirmshouldborrowmoneytothepointwherethetaxbenefitfromdebtisequaltothecostoftheincreasedprobabilityoffinancialdistress.

E.

financialriskisdeterminedbythedebt-equityratio.

29.

Thepropositionthatthevalueofaleveredfirmisequaltothevalueofanunleveredfirmisknownas:

A.

MMPropositionIwithnotax.

B.

MMPropositionIIwithnotax.

C.

MMPropositionIwithtax.

D.

MMPropositionIIwithtax.

E.

statictheoryproposition.

30.

Theconceptofhomemadeleverageismostassociatedwith:

A.

MMPropositionIwithnotax.

B.

MMPropositionIIwithnotax.

C.

MMPropositionIwithtax.

D.

MMPropositionIIwithtax.

E.

statictheoryproposition.

31.

WhichofthefollowingstatementsarecorrectinrelationtoMMPropositionIIwithnotaxes？

I.Therequiredreturnonassetsisequaltotheweightedaveragecostofcapital.

II.Financialriskisdeterminedbythedebt-equityratio.

III.Financialriskdeterminesthereturnonassets.

IV.Thecostofequitydeclineswhentheamountofleverageusedbyafirmrises.

A.

IandIIIonly

B.

IIandIVonly

C.

IandIIonly

D.

IIIandIVonly

E.

IandIVonly

32.

MMPropositionIwithtaxessupportsthetheorythat:

A.

thereisapositivelinearrelationshipbetweentheamountofdebtinaleveredfirmanditsvalue.

B.

thevalueofafirmisinverselyrelatedtotheamountofleverageusedbythefirm.

C.

thevalueofanunleveredfirmisequaltothevalueofaleveredfirmplusthevalueoftheinteresttaxshield.

D.

afirm'scostofcapitalisthesameregardlessofthemixofdebtandequityusedbythefirm.

E.

afirm'sweightedaveragecostofcapitalincreasesasthedebt-equityratioofthefirmrises.

33.

MMPropositionIwithtaxesisbasedontheconceptthat:

A.

theoptimalcapitalstructureistheonethatistotallyfinancedwithequity.

B.

thecapitalstructureofthefirmdoesnotmatterbecauseinvestorscanusehomemadeleverage.

C.

thefirmisbetteroffwithdebtbasedontheweightedaveragecostofcapital.

D.

thevalueofthefirmincreasesastotaldebtincreasesbecauseoftheinteresttaxshield.

E.

thecostofequityincreasesasthedebt-equityratioofafirmincreases.

34.

MMPropositionIIwithtaxes:

A.

hasthesamegeneralimplicationsasMMPropositionIIwithouttaxes.

B.

revealshowtheinteresttaxshieldrelatestothevalueofafirm.

C.

supportstheargumentthatbusinessriskisdeterminedbythecapitalstructureemployedbyafirm.

D.

supportstheargumentthatthecostofequitydecreasesasthedebt-equityratioincreases.

E.

reachesthefinalconclusionthatthecapitalstructuredecisionisirrelevanttothevalueofafirm.

35.

MMPropositionIIisthepropositionthat:

A.

supportstheargumentthatthecapitalstructureofafirmisirrelevanttothevalueofthefirm.

B.

thecostofequitydependsonthereturnondebt,thedebt-equityratioandthetaxrate.

C.

afirm'scostofequitycapitalisapositivelinearfunctionofthefirm'scapitalstructure.

D.

thecostofequityisequivalenttotherequiredreturnonthetotalassetsofafirm.

E.

supportstheargumentthatthesizeofthepiedoesnotdependonhowthepieissliced.

36.

Theinteresttaxshieldhasnovalueforafirmwhen:

I.thetaxrateisequaltozero.

II.thedebt-equityratioisexactlyequalto1.

III.thefirmisunlevered.

IV.afirmelects100%equityasitscapitalstructure.

A.

IandIIIonly

B.

IIandIVonly

C.

I,III,andIVonly

D.

II,III,andIVonly

E.

I,II,andIVonly

37.

Theinteresttaxshieldisakeyreasonwhy:

A.

therequiredrateofreturnonassetsriseswhendebtisaddedtothecapitalstructure.

B.

thevalueofanunleveredfirmisequaltothevalueofaleveredfirm.

C.

thenetcostofdebttoafirmisgenerallylessthanthecostofequity.

D.

thecostofdebtisequaltothecostofequityforaleveredfirm.

E.

firmspreferequityfinancingoverdebtfinancing.

38.

Whichofthefollowingwilltendtodiminishthebenefitoftheinteresttaxshieldgivenaprogressivetaxratestructure？

I.areductionintaxrates

II.alargetaxlosscarryforward

III.alargedepreciationtaxdeduction

IV.asizeableincreaseintaxableincome

A.

IandIIonly

B.

IandIIIonly

C.

IIandIIIonly

D.

I,II,andIIIonly

E.

I,II,III,andIV

39.

Thompson&Thomsonisanallequityfirmthathas500,000sharesofstockoutstanding.Thecompanyisintheprocessofborrowing$8millionat9%interesttorepurchase200,000sharesoftheoutstandingstock.Whatisthevalueofthisfirmifyouignoretaxes

A.

$million

B.

$million

C.

$million

D.

$million

E.

$million

40.

UptownInteriorDesignsisanallequityfirmthathas40,000sharesofstockoutstanding.Thecompanyhasdecidedtoborrow$1milliontobuyoutthesharesofadeceasedstockholderwhoholds2,500shares.Whatisthetotalvalueofthisfirmifyouignoretaxes

A.

$million

B.

$million

C.

$million

D.

$million

E.

$million

41.

Youown25%ofUniqueVacations,Inc.Youhavedecidedtoretireandwanttosellyoursharesinthiscloselyheld,allequityfirm.Theothershareholdershaveagreedtohavethefirmborrow$milliontopurchaseyour1,000sharesofstock.Whatisthetotalvalueofthisfirmtodayifyouignoretaxes

A.

$million

B.

$million

C.

$million

D.

$million

E.

$million

42.

Yourfirmhasadebt-equityratioof.75.Yourpre-taxcostofdebtis%andyourrequiredreturnonassetsis15%.Whatisyourcostofequityifyouignoretaxes

A.

%

B.

%

C.

%

D.

%

E.

%

43.

Bigelow,Inc.hasacostofequityof%andapre-taxcostofdebtof7%.Therequiredreturnontheassetsis11%.Whatisthefirm'sdebt-equityratiobasedonMMPropositionIIwithnotaxes

A.

.60

B.

.64

C.

.72

D.

.75

E.

.80

44.

TheBackwoodsLumberCo.hasadebt-equityratioof.80.Thefirm'srequiredreturnonassetsis12%anditscostofequityis%.Whatisthepre-taxcostofdebtbasedonMMPropositionIIwithnotaxes

A.

%

B.

%

C.

%

D.

%

E.

%

45.

TheWinterWearCompanyhasexpectedearningsbeforeinterestandtaxesof$2,100,anunleveredcostofcapitalof14%andataxrateof34%.Thecompanyalsohas$2,800ofdebtthatcarriesa7%coupon.Thedebtissellingatparvalue.Whatisthevalueofthisfirm

A.

$9,900

B.

$10,852

C.

$11,748

D.

$12,054

E.

$12,700

46.

Gail'sDanceStudioiscurrentlyanallequityfirmthathas80,000sharesofstockoutstandingwithamarketpriceof$42ashare.Thecurrentcostofequityis12%andthetaxrateis34%.Gailisconsideringadding$1millionofdebtwithacouponrateof8%tohercapitalstructure.Thedebtwillbesoldatparvalue.Whatistheleveredvalueoftheequity

A.

$million

B.

$million

C.

$million

D.

$million

E.

$million

47.

TheMontanaHillsCo.hasexpectedearningsbeforeinterestandtaxesof$8,100,anunleveredcostofcapitalof11%,anddebtwithbothabookandfacevalueof$12,000.Thedebthasanannual8%coupon.Thetaxrateis34%.Whatisthevalueofthefirm

A.

$48,600

B.

$50,000

C.

$52,680

D.

$56,667

E.

$60,600

48.

Scott'sLeisureTimeSportsisanunleveredfirmwithanafter-taxnetincomeof$86,000.Theunleveredcostofcapitalis10%andthetaxrateis34%.Whatisthevalueofthisfirm

A.

$567,600

B.

$781,818

C.

$860,000

D.

$946,000

E.

$1,152,400

49.

Anunleveredfirmhasacostofcapitalof14%andearningsbeforeinterestandtaxesof$150,000.Aleveredfirmwiththesameoperationsandassetshasbothabookvalueandafacevalueofdebtof$700,000witha7%annualcoupon.Theapplicabletaxrateis35%.Whatisthevalueoftheleveredfirm

A.

$696,429

B.

$907,679

C.

$941,429

D.

$1,184,929

E.

$1,396,429

50.

TheSpartanCo.hasanunleveredcostofcapitalof11%,acostofdebtof8%,andataxrateof35%.Whatisthetargetdebt-equityratioifthetargetedcostofequityis12%

A.

.44

B.

.49

C.

.51

D.

.56

E.

.62

51.

HeyGuys!,Inc.hasdebtwithbothafaceandamarketvalueof$3,000.Thisdebthasacouponrateof7%andpaysinterestannually.Theexpectedearningsbeforeinterestandtaxesis$1,200,thetaxrateis34%,andtheunleveredcostofcapitalis12%.Whatisthefirm'scostofequity

A.

%

B.

%

C.

%

D.

%

E.

%

52.

Anderson'sFurnitureOutlethasanunleveredcostofcapitalof10%,ataxrateof34%,andexpectedearningsbeforeinterestandtaxesof$1,600.Thecompanyhas$3,000inbondsoutstandingthathavean8%couponandpayinterestannually.Thebondsaresellingatparvalue.Whatisthecostofequity

A.

%

B.

%

C.

%

D.

%

E.

%

53.

Walter'sDistributorshasacostofequityof%andanunleveredcostofcapitalof12%.Thecompanyhas$5,000indebtthatissellingatparvalue.Theleveredvalueofthefirmis$12,000andthetaxrateis34%.Whatisthepre-taxcostofdebt

A.

%

B.

%

C.

%

D.

%

E.

%

54.

Rosita'shasacostofequityof%andapre-taxcostofdebtof%.Thedebt-equityratiois.60andthetaxrateis.34.WhatisRosita'sunleveredcostofcapital

A.

%

B.

%

C.

%

D.

%

E.

%

55.

Yourfirmhasapre-taxcostofdebtof7%andanunleveredcostofcapitalof13%.Yourtaxrateis35%andyourcostofequityis%.Whatisyourdebt-equityratio

A.

.43

B.

.49

C.

.51

D.

.54

E.

.58

56.

WildFlowersExpresshasadebt-equityratioof.60.Thepre-taxcostofdebtis9%whiletheunleveredcostofcapitalis14%.Whatisthecostofequityifthetaxrateis34%

A.

%

B.

%

C.

%

D.

%

E.

%

57.

Yourfirmhasa$250,000bondissueoutstanding.Thesebondshavea7%coupon,payinterestsemiannually,andhaveacurrentmarketpriceequalto103%offacevalue.Whatistheamountoftheannualinteresttaxshieldgivenataxrateof35%

A.

$6,125

B.

$6,309

C.

$9,500

D.

$17,500

E.

$18,025

58.

Bertha'sBoutiquehas2,000bondsoutstandingwithafacevalueof$1,000eachandacouponrateof9%.Theinterestispaidsemi-annually.Whatistheamountoftheannualinteresttaxshieldifthetaxrateis34%

A.

$58,500

B.

$60,100

C.

$60,750

D.

$61,200

E.

$62,250

59.

Juanita'sSteakHousehas$12,000ofdebtoutstandingthatissellingatparandhasacouponrateof8%.Thetaxrateis34%.Whatisthepresentvalueofthetaxshield

A.

$2,823

B.

$2,887

C.

$4,080

D.

$4,500

E.

$4,633

60.

Afirmhasdebtof$5,000,equityof$16,000,aleveragedvalueof$8,900,acostofdebtof8%,acostofequityof12%,andataxrateof34%.Whatisthefirm'sweightedaveragecostofcapital

A.

%

B.

%

C.

%

D.

%

E.

%

61.

Afirmhaszerodebtinitscapitalstructure.Itsoverallcostofcapitalis10%.Thefirmisconsideringanewcapitalstructurewith60%debt.Theinterestrateonthedebtwouldbe8%.Assumingtherearenotaxesorotherimperfections,itscostofequitycapitalwiththenewcapitalstructurewouldbe_____.

A.

9%

B.

10%

C.

13%

D.

14%

E.

Noneoftheabove.

62.

Afirmhasadebt-to-equityratioof.60.Itscostofdebtis8%.Itsoverallcostofcapitalis12%.Whatisitscostofequityiftherearenotaxesorotherimperfections

A.

%

B.

%

C.

%

D.

%

E.

Noneoftheabove.

63.

Afirmhasadebt-to-equityratioof1.Itscostofequityis16%,anditscostofdebtis8%.Iftherearenotaxesorotherimperfections,whatwouldbeitscostofequityifthedebt-to-equityratiowere0

A.

8%

B.

10%

C.

12%

D.

14%

E.

16%

64.

Afirmhasadebt-to-equityratioof.Ifithadnodebt,itscostofequitywouldbe15%.Itscostofdebtis10%.Whatisitscostofequityiftherearenotaxesorotherimperfections

A.

10%

B.

15%

C.

18%

D.

21%

E.

Noneoftheabove.

65.

Ifafirmisunleveredandhasacostofequitycapitalof12%,whatwoulditscostofequitybeifitsdebt-equityratiobecame2Theexpectedcostofdebtis8%.

A.

%

B.

%

C.

%

D.

%

E.

Noneoftheabove.

66.

Afirmhaszerodebtinitscapitalstructure.Itsoverallcostofcapitalis9%.Thefirmisconsideringanewcapitalstructurewith40%debt.Theinterestrateonthedebtwouldbe4%.Assumingthatthecorporatetaxrateis34%,whatwoulditscostofequitycapitalwiththenewcapitalstructurebe

A.

%

B.

%

C.

%

D.

%

E.

Noneoftheabove.

67.

Afirmhasadebt-to-equityratioof1.Itscostofequityis16%,anditscostofdebtis8%.Ifthecorporatetaxrateis25%,whatwoulditscostofequitybeifthedebt-to-equityratiowere0

A.

%

B.

%

C.

%

D.

%

E.

Noneoftheabove.

68.

Afirmhasadebt-to-equityratioof.5.Itscostofequityis22%,anditscostofdebtis16%.Ifthecorporatetaxrateis.40,whatwoulditscostofequitybeifthedebt-to-equityratiowere0

A.

%

B.

%

C.

%

D.

%

E.

Noneoftheabove.

69.

Afirmhasadebt-to-equityratioof.Ifithadnodebt,itscostofequitywouldbe14%.Itscostofdebtis10%.Whatisitscostofequityifthecorporatetaxrateis50%

A.

%

B.

%

C.

%

D.

%

E.

Noneoftheabove.

70.

Whatisthecostofequityforafirmifthecorporatetaxrateis40%Thefirmhasadebt-to-equityratioof.Ifithadnodebt,itscostofequitywouldbe16%.Itscurrentcostofdebtis10%.

A.

%

B.

%

C.

%

D.

%

E.

Noneoftheabove.

71.

Afirmhasadebt-to-equityratioof.Ifithadnodebt,itscostofequitywouldbe9%.Itscostofdebtis7%.Whatisitscostofequityifthecorporatetaxrateis50%

A.

%

B.

%

C.

%

D.

%

E.

Noneoftheabove.

72.

Batter'sHomehas3,000bondsoutstandingwithafacevalueof$1,000eachandacouponrateof8%.Theinterestispaidsemi-annually.Whatistheamountoftheannualinteresttaxshieldifthetaxrateis30%

A.

$52,000

B.

$60,000

C.

$62,500

D.

$68,000

E.

$72,000

73.

ReenaIndustrieshas$10,000ofdebtoutstandingthatissellingatparandhasacouponrateof7%.Thetaxrateis34%.Whatisthepresentvalueofthetaxshield

A.

$2,800

B.

$3,000

C.

$3,400

D.

$3,800

E.

$

74.

Afirmhasdebtof$7,000,equityof$12,000,aleveragedvalueof$8,900,acostofdebtof7%,acostofequityof14%,andataxrateof30%.Whatisthefirm'sweightedaveragecostofcapital

A.

%

B.

%

C.

%

D.

%

E.

%

EssayQuestions

75.

BasedonMMwithtaxesandwithouttaxes,howmuchtimeshouldafinancialmanagerspendanalyzingthecapitalstructureofhisfirmWhatiftheanalysisisbasedonthestatictheory

76.

Explainhomemadeleverageandwhyitmatters.

77.

Ineachofthetheoriesofcapitalstructurethecostofequityrisesastheamountofdebtincreases.Sowhydon'tfinancialmanagersuseaslittledebtaspossibletokeepthecostofequitydownAfterall,isn'tthegoalofthefirmtomaximizesharevalueandminimizeshareholdercosts

Considertwofirms,UandL,bothwith$50,000inassets.FirmUisunlevered,andfirmLhas$20,000ofdebtthatpays8%interest.FirmUhas1,000sharesoutstanding,whilefirmLhas600sharesoutstanding.Mikeowns20%offirmLandbelievesthatleverageworksinhisfavor.StevetellsMikethatthisisanillusion,andthatwiththepossibilityofborrowingonhisownaccountat8%interest,hecanreplicateMike'spayoutfromfirmL.

78.

Givenalevelofoperatingincomeof$2,500,showthespecificstrategythatMikehasinmind.

79.

AfterseeingSteve'sanalysis,MiketellsStevethatwhilehisanalysislooksgoodonpaper,Stevewillneverbeabletoborrowat8%,butwouldhavetopayamorerealisticrateof12%.IfMikeisright,whatwillSteve'spayoutbe

80.

Supposethetaxauthoritiesallowfirmstodeducttheirinterestexpensefromoperatingincome.BothfirmUandfirmLareinthe34%taxbracket.ShowwhathappenstothemarketvalueofbothfirmsifthedebtheldbyfirmLispermanent.AssumeMMwithtaxes.

81.

TheNantucketNuggetisunleveredandisvaluedat$640,000.Nantucketiscurrentlydecidingwhetherincludingdebtinitscapitalstructurewouldincreaseitsvalue.Thecurrentcostofequityis12%.Underconsiderationisissuing$300,000innewdebtwithan8%interestrate.Nantucketwouldrepurchase$300,000ofstockwiththeproceedsofthedebtissue.Therearecurrently32,000sharesoutstandingandeffectivemarginaltaxbracketiszero.WhatwillNantucket'snewWACCbe

82.

TheNantucketNu