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1 | |
If a firm permanently borrows $20 million at an interest rate of 8%, what is the present value of the interest tax shield? Assume a 35% tax rate. |
| | A) | $7.00 million |
| | B) | $8.75 million |
| | C) | $16.50 million |
| | D) | $25.00 million |
| | E) | None of the above |
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2 | |
In order to calculate the tax shield effect of interest payment, always use: |
| | A) | Average tax rate |
| | B) | Marginal tax rate |
| | C) | State mandated tax rate |
| | D) | None of the above |
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3 | |
The positive value to the firm by adding debt to the capital structure in the presence of corporate taxes is: |
| | A) | Due to the extra cash flow going to the investors of the firm rather than the tax authorities |
| | B) | Due to the earnings before interest and taxes being fully taxed at the corporate rate |
| | C) | Because personal tax rates are the same as corporate tax rates |
| | D) | Because shareholders prefer to let financial managers choose the capital structure thus making their value independent of it |
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4 | |
The Akron Company is unlevered with assets of $30 million and EBIT of $5 million. If the firm's tax rate is 34%, calculate its after-tax cash flow. |
| | A) | $2.40 million |
| | B) | $3.30 million |
| | C) | $3.96 million |
| | D) | $10.20 million |
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5 | |
If Miller is right and AAA corporate bonds yield 15%, what should be the yield on AAA municipal bonds? Assume a 35% corporate tax rate. |
| | A) | 9.75% |
| | B) | 12.35% |
| | C) | 15.00% |
| | D) | 23.08% |
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6 | |
If companies are unsure whether they will make taxable profits in the future: |
| | A) | Safe, profitable companies will have an incentive to issue more debt than risky, unprofitable companies |
| | B) | The aggregate amount of debt issued will be higher than predicted by Miller's theory of debt and taxes |
| | C) | The equilibrium interest rate on corporate debt will be higher than predicted by Miller |
| | D) | None of the above |
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7 | |
The possibility of bankruptcy has a negative effect on the value of the firm because: |
| | A) | Increased bankruptcy risk lowers value |
| | B) | Reorganization is costless but risk is not |
| | C) | A bankruptcy has real costs associated with it |
| | D) | Value enhancing strategies are no longer available |
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8 | |
What are some of the possible consequences of financial distress? |
| | A) | Debt holders, who face the prospect of getting only part of their money back, are likely to want the company to take additional risks. |
| | B) | Equity investors would like the company to cut its dividend payments to conserve cash. |
| | C) | Equity investors would like the firm to shift toward riskier lines of business |
| | D) | Equity investors would like the firm to settle up with creditors as fast as possible |
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9 | |
The main difference between a positive and negative covenant is (are): |
| | A) | A positive covenant is one you must not do while a negative covenant must be carried out |
| | B) | Actions that you must do regularly versus periodically |
| | C) | A positive covenant is one you must do while a negative covenant is to limit actions the firm can take |
| | D) | No difference as they are both restrictive |
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10 | |
The trade-off theory of capital structure predicts that: |
| | A) | Unprofitable firms should borrow more than profitable ones |
| | B) | Safe firms should borrow more than risky ones |
| | C) | Rapidly growing firms should borrow more than mature firms |
| | D) | Increasing leverage increases firm value |
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11 | |
The pecking order theory of capital structure predicts that: |
| | A) | If two firms are equally profitable, the more rapidly growing firm will borrow more, other things equal |
| | B) | Firms prefer equity to debt financing |
| | C) | Risky firms will end up borrowing less |
| | D) | Risky firms will end up borrowing more |
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12 | |
Financial slack means: |
| | A) | Cash and marketable securities |
| | B) | Readily saleable real assets |
| | C) | Ready access to the debt markets |
| | D) | Ready access to the equity markets |
| | E) | All of the above |
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13 | |
The tax incentives to issue debt are highest for profitable companies, which are sure to pay taxes in the future. |
| | A) | True |
| | B) | False |
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14 | |
The corporate tax shield on interest payments is worth more to some firms than to others. |
| | A) | True |
| | B) | False |
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15 | |
Bankruptcy not only has direct costs but also indirect costs. |
| | A) | True |
| | B) | False |
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