Question 1

Percy's Wholesale Supply has earnings before interest and taxes of $106,000.Both the book and the market value of debt is $170,000.The unlevered cost of equity is 15.5 percent while the pre-tax cost of debt is 8.6 percent.The tax rate is 38 percent.What is the firm's weighted average cost of capital?

Accepted Answer

A)   11.94 percent
B)   12.65 percent
C)   13.45 percent
D)   14.01 percent
E)   14.37 percentF) A) and C)
G) B) and E)

Question 2

The interest tax shield has no value when a firm has a:
I.tax rate of zero.
II.debt-equity ratio of 1.
III.zero debt.
IV.zero leverage.

Accepted Answer

A)   I and III only
B)   II and IV only
C)   I,III,and IV only
D)   II,III,and IV only
E)   I,II,and IV onlyF) A) and C)
G) B) and E)

Question 3

In general,the capital structures used by U.S.firms:

Accepted Answer

A)   tend to overweigh debt in relation to equity.
B)   generally result in debt-equity ratios between 0.45 and 0.60.
C)   are fairly standard for all SIC codes.
D)   tend to be those which maximize the use of the firm's available tax shelters.
E)   vary significantly across industries.F) A) and B)
G) B) and D)

Question 4

The Pizza Palace has a cost of equity of 15.3 percent and an unlevered cost of capital of 11.8 percent.The company has $22,000 in debt that is selling at par value.The levered value of the firm is $41,000 and the tax rate is 34 percent.What is the pre-tax cost of debt?

Accepted Answer

A)   4.73 percent
B)   6.18 percent
C)   6.59 percent
D)   7.22 percent
E)   9.92 percentF) D) and E)
G) A) and B)

Question 5

Which of the following statements related to financial risk are correct?
I.Financial risk is the risk associated with the use of debt financing.
II.As financial risk increases so too does the cost of equity.
III.Financial risk is wholly dependent upon the financial policy of a firm.
IV.Financial risk is the risk that is inherent in a firm's operations.

Accepted Answer

A)   I and III only
B)   II and IV only
C)   II and III only
D)   I,II,and III only
E)   I,II,III,and IVF) C) and D)
G) B) and E)

Question 6

AA Tours is comparing two capital structures to determine how to best finance its operations.The first option consists of all equity financing.The second option is based on a debt-equity ratio of 0.45.What should AA Tours do if its expected earnings before interest and taxes (EBIT) are less than the break-even level? Assume there are no taxes.

Accepted Answer

A)   select the leverage option because the debt-equity ratio is less than 0.50
B)   select the leverage option since the expected EBIT is less than the break-even level
C)   select the unlevered option since the debt-equity ratio is less than 0.50
D)   select the unlevered option since the expected EBIT is less than the break-even level
E)   cannot be determined from the information providedF) B) and C)
G) A) and E)

Question 7

The optimal capital structure:

Accepted Answer

A)   will be the same for all firms in the same industry.
B)   will remain constant over time unless the firm changes its primary operations.
C)   will vary over time as taxes and market conditions change.
D)   places more emphasis on operations than on financing.
E)   is unaffected by changes in the financial markets.F) A) and E)
G) A) and C)

Question 8

Which one of the following will generally have the highest priority when assets are distributed in a bankruptcy proceeding?

Accepted Answer

A)   consumer claim
B)   dividend payment to preferred shareholder
C)   company contribution to the employees' retirement account
D)   payment to an unsecured creditor
E)   payment of employee wagesF) A) and D)
G) D) and E)

Question 9

The business risk of a firm:

Accepted Answer

A)   depends on the firm's level of unsystematic risk.
B)   is inversely related to the required return on the firm's assets.
C)   is dependent upon the relative weights of the debt and equity used to finance the firm.
D)   has a positive relationship with the firm's cost of equity.
E)   has no relationship with the required return on a firm's assets according to M & M Proposition II.F) C) and D)
G) All of the above

Question 10

Based on the M & M propositions with and without taxes,how much time should a financial manager spend analyzing the capital structure of a firm? What if the analysis is based on the static theory?

Accepted Answer

Under either M & M scenario,a financial ...

Question 11

D.L.Tuckers has $21,000 of debt outstanding that is selling at par and has a coupon rate of 7.5 percent.The tax rate is 32 percent.What is the present value of the tax shield?

Accepted Answer

A)   $504
B)   $615
C)   $644
D)   $6,200
E)   $6,720F) A) and B)
G) D) and E)

Question 12

Kelso Electric is debating between a leveraged and an unleveraged capital structure.The all equity capital structure would consist of 40,000 shares of stock.The debt and equity option would consist of 25,000 shares of stock plus $280,000 of debt with an interest rate of 7 percent.What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes.

Accepted Answer

A)   $42,208
B)   $44,141
C)   $46,333
D)   $49,667
E)   $52,267F) B) and E)
G) A) and B)

Question 13

W.V.Trees,Inc.has a debt-equity ratio of 1.4.Its WACC is 10 percent,and its cost of debt is 9 percent.The corporate tax rate is 33 percent.What is the firm's unlevered cost of equity capital?

Accepted Answer

A)   12.38 percent
B)   12.79 percent
C)   13.68 percent
D)   14.10 percent
E)   14.45 percentF) A) and B)
G) A) and C)

Question 14

Which one of the following is the equity risk that is most related to the daily operations of a firm?

Accepted Answer

A)   market risk
B)   systematic risk
C)   extrinsic risk
D)   business risk
E)   financial riskF) B) and E)
G) None of the above

Question 15

Which one of the following is a direct bankruptcy cost?

Accepted Answer

A)   company CEO's time spent in bankruptcy court
B)   maintaining cash reserves
C)   maintaining a debt-equity ratio that is lower than the optimal ratio
D)   losing a key company employee
E)   paying an outside accountant fees to prepare bankruptcy reportsF) B) and E)
G) B) and D)

Question 16

The explicit costs,such as legal and administrative expenses,associated with corporate default are classified as _____ costs.

Accepted Answer

A)   flotation
B)   issue
C)   direct bankruptcy
D)   indirect bankruptcy
E)   unleveredF) B) and C)
G) None of the above

Question 17

The unlevered cost of capital refers to the cost of capital for a(n) :

Accepted Answer

A)   private entity.
B)   all-equity firm.
C)   governmental entity.
D)   private individual.
E)   corporate shareholder.F) A) and D)
G) C) and D)

Question 18

Which one of the following makes the capital structure of a firm irrelevant?

Accepted Answer

A)   taxes
B)   interest tax shield
C)   100 percent dividend payout ratio
D)   debt-equity ratio that is greater than 0 but less than 1
E)   homemade leverageF) A) and D)
G) C) and D)

Question 19

M & M Proposition I with no tax supports the argument that:

Accepted Answer

A)   business risk determines the return on assets.
B)   the cost of equity rises as leverage rises.
C)   the debt-equity ratio of a firm is completely irrelevant.
D)   a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.
E)   homemade leverage is irrelevant.F) C) and E)
G) A) and C)

Question 20

Georga's Restaurants has 5,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 8.25 percent.The interest is paid semi-annually.What is the amount of the annual interest tax shield if the tax rate is 37 percent?

Accepted Answer

A)   $152,625.00
B)   $162,411.90
C)   $187,750.00
D)   $210,420.00
E)   $233,887.50F) All of the above
G) None of the above

Exam 16: Financial Leverage and Capital Structure Policy

The explicit costs,such as legal and administrative expenses,associated with corporate default are classified as _____ costs.

Correct Answer
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Which one of the following is the equity risk that is most related to the daily operations of a firm?

Correct Answer
verified

Correct Answer
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Which one of the following will generally have the highest priority when assets are distributed in a bankruptcy proceeding?

Correct Answer
verified

The optimal capital structure:

Correct Answer
verified

The interest tax shield has no value when a firm has a: I.tax rate of zero. II.debt-equity ratio of 1. III.zero debt. IV.zero leverage.

Correct Answer
verified

D.L.Tuckers has $21,000 of debt outstanding that is selling at par and has a coupon rate of 7.5 percent.The tax rate is 32 percent.What is the present value of the tax shield?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Based on the M & M propositions with and without taxes,how much time should a financial manager spend analyzing the capital structure of a firm? What if the analysis is based on the static theory?

Correct Answer
verified
Under either M & M scenario,a financial ...
View Answer

Which one of the following is a direct bankruptcy cost?

Correct Answer
verified

Georga's Restaurants has 5,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 8.25 percent.The interest is paid semi-annually.What is the amount of the annual interest tax shield if the tax rate is 37 percent?

Correct Answer
verified

The Pizza Palace has a cost of equity of 15.3 percent and an unlevered cost of capital of 11.8 percent.The company has $22,000 in debt that is selling at par value.The levered value of the firm is $41,000 and the tax rate is 34 percent.What is the pre-tax cost of debt?

Correct Answer
verified

Which one of the following makes the capital structure of a firm irrelevant?

Correct Answer
verified

Correct Answer
verified

The unlevered cost of capital refers to the cost of capital for a(n) :

Correct Answer
verified

M & M Proposition I with no tax supports the argument that:

Correct Answer
verified

In general,the capital structures used by U.S.firms:

Correct Answer
verified

W.V.Trees,Inc.has a debt-equity ratio of 1.4.Its WACC is 10 percent,and its cost of debt is 9 percent.The corporate tax rate is 33 percent.What is the firm's unlevered cost of equity capital?

Correct Answer
verified

The business risk of a firm:

Correct Answer
verified

Exam 16: Financial Leverage and Capital Structure Policy

The explicit costs,such as legal and administrative expenses,associated with corporate default are classified as _____ costs.

Correct AnswerverifiedShow Answer

Which one of the following is the equity risk that is most related to the daily operations of a firm?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following will generally have the highest priority when assets are distributed in a bankruptcy proceeding?

Correct AnswerverifiedShow Answer

The optimal capital structure:

Correct AnswerverifiedShow Answer

The interest tax shield has no value when a firm has a: I.tax rate of zero. II.debt-equity ratio of 1. III.zero debt. IV.zero leverage.

Correct AnswerverifiedShow Answer

D.L.Tuckers has $21,000 of debt outstanding that is selling at par and has a coupon rate of 7.5 percent.The tax rate is 32 percent.What is the present value of the tax shield?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Based on the M & M propositions with and without taxes,how much time should a financial manager spend analyzing the capital structure of a firm? What if the analysis is based on the static theory?

Correct AnswerverifiedUnder either M & M scenario,a financial ...View AnswerShow Answer

Which one of the following is a direct bankruptcy cost?

Correct AnswerverifiedShow Answer

Georga's Restaurants has 5,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 8.25 percent.The interest is paid semi-annually.What is the amount of the annual interest tax shield if the tax rate is 37 percent?

Correct AnswerverifiedShow Answer

The Pizza Palace has a cost of equity of 15.3 percent and an unlevered cost of capital of 11.8 percent.The company has $22,000 in debt that is selling at par value.The levered value of the firm is $41,000 and the tax rate is 34 percent.What is the pre-tax cost of debt?

Correct AnswerverifiedShow Answer

Which one of the following makes the capital structure of a firm irrelevant?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The unlevered cost of capital refers to the cost of capital for a(n) :

Correct AnswerverifiedShow Answer

M & M Proposition I with no tax supports the argument that:

Correct AnswerverifiedShow Answer

In general,the capital structures used by U.S.firms:

Correct AnswerverifiedShow Answer

W.V.Trees,Inc.has a debt-equity ratio of 1.4.Its WACC is 10 percent,and its cost of debt is 9 percent.The corporate tax rate is 33 percent.What is the firm's unlevered cost of equity capital?

Correct AnswerverifiedShow Answer

The business risk of a firm:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Under either M & M scenario,a financial ...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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