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1 | |
According to _____, the value of the firm is independent of its capital structure. |
| | A) | MM Proposition I, with tax |
| | B) | MM Proposition I, no tax |
| | C) | the static theory of capital structure |
| | D) | MM Proposition II, no tax |
| | E) | MM Proposition II, with tax |
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2 | |
According to _____, a firm's cost of equity is a positively related to leverage. |
| | A) | MM Proposition I, with tax |
| | B) | MM Proposition I, no tax |
| | C) | MM Proposition II, no tax |
| | D) | MM Proposition III, no tax |
| | E) | MM Proposition III, with tax |
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3 | |
All else equal, which one of the following statements is true concerning the interest tax shield of a firm that has positive earnings before interest and taxes? |
| | A) | The higher the corporate tax rate, the less valuable the interest tax shield. |
| | B) | If the firm dramatically increases its depreciation expense it may have more of a need for an interest tax shield. |
| | C) | The present value of the interest tax shield is equal to the amount of debt multiplied by the corporate tax rate. |
| | D) | The interest tax shield increases as a firm reduces its level of debt outstanding. |
| | E) | Since the interest tax shield is valuable for a firm, the firm would rather pay a high coupon rate on its bonds than a low coupon rate. |
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4 | |
Which one of the following correctly describes the value of a levered firm with perpetual debt under MM Proposition I, with tax? |
| | A) | VL = VU + tC + B |
| | B) | VL = VU x tCB |
| | C) | VL = VU - tCB |
| | D) | VL = VU + tCB |
| | E) | VL = VU x (tC - B) |
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5 | |
Which one of the following correctly describes the value of a levered firm according to MM Proposition I, with tax? |
| | A) | |
| | B) | |
| | C) | | VL | | = | | EBIT × (1 + tc) × (B/S) | | | | |
| | Ro |
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| | D) | | VL | | = | | EBIT × (1 - tc) × (B/S) | | | | |
| | Ro |
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| | E) | |
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6 | |
Which one of the following correctly describes MM Proposition II, with tax? |
| | A) | RS = R0 + (R0 - RB)(B/S)(1 - tc) |
| | B) | RS = RB + (RB- RA)(B/S)(1 - tc) |
| | C) | RS = R0 x (R0- RA) + (B/S)(1 + tc) |
| | D) | RS = R0 + (R0 - RB)(S/B) + (1 + tc) |
| | E) | RS = R0 + (RA - RB)(S/B) + (1 - tc) |
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7 | |
_____ suggests that value-maximizing financial managers will employ capital structures composed almost entirely of debt. |
| | A) | MM Proposition I, with tax, |
| | B) | MM Proposition I, no tax, |
| | C) | MM Proposition III, with tax, |
| | D) | MM Proposition II, no tax, |
| | E) | MM Proposition II, with tax, |
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8 | |
The Stein Co. has $35,000 of debt outstanding that is selling at par. The coupon rate is 8 percent and the tax rate is 35 percent. The annual tax shield is _____ and the present value of the tax shield is _____. |
| | A) | $980; $2,800 |
| | B) | $980; $12,250 |
| | C) | $980; $35,000 |
| | D) | $2,800; $12,250 |
| | E) | $2,800; $35,000 |
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9 | |
The Daytime Company has 25,000 bonds outstanding with a face value of $1,000 and a current value of $1,010.06. The bonds have an 8 percent coupon, pay interest annually, and mature in 9 years. The tax rate is 34 percent. The annual tax shield is _____ and the present value of the tax shield is _____. |
| | A) | $26,656; $8.5 million |
| | B) | $26,656; $25 million |
| | C) | $666,400; $2 million |
| | D) | $666,400; $8.5 million |
| | E) | $680,000; $8.5 million |
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10 | |
Taylor & Co. is an all-equity firm with earnings before interest and taxes of $68,000. The unlevered cost of capital is 14 percent. The company is considering adding $100,000 of debt to the capital structure at an interest cost of 8 percent. The tax rate is 35 percent. The unlevered value of the firm is _____ and the levered value is _____. |
| | A) | $315,714.29; $350,714.29 |
| | B) | $315,714.29; $415,714.29 |
| | C) | $485,714.29; $450,714.29 |
| | D) | $485,714.29; $585,714.29 |
| | E) | $850,000; $950,000 |
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