公司理财Submission to ch16-17

Submission to

Ch16-17

Your saved submission... Student: 朱, 喜 (13030433) Score: 98 out of 102 (96%) Date: 06/07/2015 20:58 Duration: * 2:11:01 * Workstation: 172.19.166.8 1. A firm has zero debt in its capital structure. Its overall cost of capital is 9%. The firm is considering a new capital structure with 40% debt. The interest rate on the debt would be 4%. Assuming that the corporate tax rate is 34%, what would the cost of equity capital with the new capital structure be?

11.2%

10.3% None of these. 11.0% 13.9%

(2)

Rs = Ro + (B/S)(1 - Tc)( Ro - rB )

Rs = .09 + (.4/.6) (1 - .34) (.09 - .04) = .09 + .022 = .112 = 11.2%

(2)

2. The optimal capital structure:

is unaffected by changes in the financial markets.

will remain constant over time unless the firm makes an acquisition.

of a firm will vary over time as taxes and market conditions change.

will be the same for all firms in the same industry.

(2)

places more emphasis on the operations of a firm rather than the financing of a firm.

3. The unlevered cost of capital is:

the cost of capital for a firm with no equity in its capital structure.

equal to the profit margin for a firm with some debt in its capital structure.

the cost of capital for a firm with no debt in its capital structure.

the interest tax shield times pretax net income.

(2)

the cost of preferred stock for a firm with equal parts debt and common stock in its capital structure.

4. The pecking order states how financing should be raised. In order to avoid

asymmetric information problems and misinterpretation of whether

management is sending a signal on security overvaluation, the firm's first rule is to:

always issue debt then the market won't know when management thinks the security is overvalued.

issue new equity first. None of these. issue debt first.

finance with internally generated funds.

(2)

5. Thompson & Thomson is an all equity firm that has 500,000 shares of

stock outstanding. The company is in the process of borrowing $8 million at 9% interest to repurchase 200,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes?

$21.2 million

$21.3 million $21.0 million $20.0 million $20.8 million

Price per share = $8m ÷ 200k = $40; [(500,000 - 200,000) × $40] + $8m = 500,000 × $40 = $20m; Value of the firm is $20m

(2)

6. MM Proposition II with taxes:

supports the argument that business risk is determined by the capital structure employed by a firm.

reaches the final conclusion that the capital structure decision is irrelevant to the value of a firm.

supports the argument that the cost of equity decreases as the debt-equity ratio increases.

has the same general implications as MM Proposition II without taxes.

reveals how the interest tax shield relates to the value of a firm.

7. Conflicts of interest between stockholders and bondholders are known as:

trustee costs.

(2)

financial distress costs. agency costs. dealer costs. underwriting costs.

(2)

8. The capital structure chosen by a firm doesn't really matter because of:

homemade leverage.

the interest tax shield. taxes.

the relationship between dividends and earnings per share. the effects of leverage on the cost of equity.

(2)

9. Your firm has a debt-equity ratio of .75. Your pre-tax cost of debt is 8.5%

and your required return on assets is 15%. What is your cost of equity if you ignore taxes?

12.21%

19.88% 16.67%

21.38% 11.25%

Re = .15 + (.15 - .085) × .75 = .19875 = 19.88%

(2)

10. The Modigliani-Miller Proposition I without taxes states:

a firm cannot change the total value of its outstanding securities by changing its capital structure proportions.

None of these.

the determination of value must consider the timing and risk of the cash flows.

managers can make correct corporate decisions that will satisfy all shareholders if they select projects that maximize value.

when new projects are added to the firm the firm value is the sum of the old value plus the new.

11. Financial leverage impacts the performance of the firm by:

maintaining the same level of volatility of the firm's EBIT.

(2)

decreasing the volatility of the firm's net income. decreasing the volatility of the firm's EBIT. None of these.

increasing the volatility of the firm's net income.

(2)

12. If a firm issues debt but writes protective and restrictive covenants into the

loan contract, then the firm's debt may be issued at a _____ interest rate compared with otherwise similar debt.

equal

significantly higher lower

Either significantly higher or slightly higher

slightly higher

(2)

13. The tax savings of the firm derived from the deductibility of interest

expense is called the:

financing umbrella.

current yield.

tax-loss carry forward savings. interest tax shield. depreciable basis.

(2)

14. The effect of financial leverage depends on the operating earnings of the

company. Which of the following is not true?

Below the indifference or break-even point in EBIT the non-levered structure is superior.

The rate of return on operating assets is unaffected by leverage.

Above the indifference or break-even point the increase in EPS for all equity structures is less than debt-equity structures. Above the indifference or break-even point the increase in EPS for all equity structures is greater than debt-equity structures.

Financial leverage increases the slope of the EPS line.

(2)

15. Jasmine's Boutique has 2,000 bonds outstanding with a face value of

$1,000 each and a coupon rate of 9%. The interest is paid semi-annually. What is the amount of the annual interest tax shield if the tax rate is 34%?

$60,100

$62,250 $60,750 $58,500 $61,200

Annual interest tax shield = 2,000 × $1,000 × .09 × .34 = $61,200

(2)

16. The interest tax shield is a key reason why:

the cost of debt is equal to the cost of equity for a levered firm.

the value of an unlevered firm is equal to the value of a levered firm.

firms prefer equity financing over debt financing.

the required rate of return on assets rises when debt is added to the capital structure.

the net cost of debt to a firm is generally less than the cost of equity.

17. The explicit costs, such as the legal expenses, associated with corporate

default are classified as _____ costs.

flotation

(2)

direct bankruptcy indirect bankruptcy unlevered beta conversion

(2)

18. In an EPS-EBI graphical relationship, the debt ray and equity ray cross. At

this point the equity and debt are:

at breakeven and MM Proposition II states that debt is the better choice.

at breakeven in EPS but above this point debt increases EPS via leverage and decreases EPS below this point.

at breakeven and debt is the better choice below breakeven because small payments can be made.

equal but away from breakeven equity is better as fewer shares are outstanding.

equivalent with respect to EPS but above and below this point equity is always superior.

19. Given realistic estimates of the probability and cost of bankruptcy, the

future costs of a possible bankruptcy are borne by:

debtholders only because if default occurs interest and principal payments are not made.

(0)

→

shareholders because debtholders will pay less for the debt providing less cash for the shareholders.

management because if the firm defaults they will lose their jobs.

None of these. all investors in the firm.

(2)

20. When comparing levered vs. unlevered capital structures, leverage works

to increase EPS for high levels of EBIT because:

interest payments on the debt vary with EBIT levels.

interest payments on the debt stay fixed, leaving more income to be distributed over less shares.

interest payments on the debt stay fixed, leaving more income to be distributed over more shares.

interest payments on the debt stay fixed, leaving less income to be distributed over less shares.

interest payments on the debt stay fixed, leaving less income to be distributed over more shares.

21. MM Proposition I with corporate taxes states that:

firm value is maximized at an all debt capital structure.

(2)

All of these.

by raising the debt-to-equity ratio, the firm can lower its taxes and thereby increase its total value.

capital structure can affect firm value. None of these.

(2)

22. The increase in risk to equityholders when financial leverage is introduced

is evidenced by:

higher EPS as EBIT increases.

None of these.

a higher variability of EPS with debt than all equity. increased use of homemade leverage.

(2)

equivalence value between levered and unlevered firms in the presence of taxes.

23. MM Proposition I with taxes supports the theory that:

the value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield.

a firm's cost of capital is the same regardless of the mix of debt and equity used by the firm.

there is a positive linear relationship between the amount of debt in a levered firm and its value.

a firm's weighted average cost of capital increases as the debt-equity ratio of the firm rises.

the value of a firm is inversely related to the amount of leverage used by the firm.

24. In an EPS-EBI graphical relationship, the slope of the debt ray is steeper

than the equity ray. The debt ray has a lower intercept because:

the higher the interest rate the greater the slope.

(2)

a fixed interest charge must be paid even at low earnings. more shares are outstanding for the same level of EBI. the break-even point is higher with debt.

(2)

the amount of interest per share has only a positive effect on the intercept.

25. Rosita's has a cost of equity of 13.8% and a pre-tax cost of debt of 8.5%.

The debt-equity ratio is .60 and the tax rate is .34. What is Rosita's unlevered cost of capital?

14.60%

12.30% 14.08% 8.83% 13.97%

.138 = RU + (RU - .085) × .60 × (1 - .34); .17166 = 1.396RU; RU = .12297

= 12.30%

(2)

26. Reena Industries has $10,000 of debt outstanding that is selling at par and

has a coupon rate of 7%. The tax rate is 34%. What is the present value of the tax shield?

$3,400

$3,000 $3,800 $2,800 $7.000

Present value of the tax shield = .34 × $10,000 = $3,400

(2)

27. When graphing firm value against debt levels, the debt level that maximizes the value of the firm is the level where:

the increase in the present value of distress costs from an additional dollar of debt is equal to the increase in the present value of the debt tax shield.

distress costs as well as debt tax shields are zero. distress costs as well as debt tax shields are maximized.

the increase in the present value of distress costs from an

additional dollar of debt is less than the increase of the present value of the debt tax shield.

the increase in the present value of distress costs from an additional dollar of debt is greater than the increase in the present value of the debt tax shield.

28. The optimal capital structure has been achieved when the:

debt-equity ratio is equal to 1.

(2)

weight of equity is equal to the weight of debt.

debt-equity ratio is such that the cost of debt exceeds the cost of equity.

debt-equity ratio selected results in the lowest possible weighed average cost of capital.

cost of equity is maximized given a pre-tax cost of debt.

(2)

29. Which of the following statements are correct in relation to MM

Proposition II with no taxes?

I. The required return on assets is equal to the weighted average cost of capital.

II. Financial risk is determined by the debt-equity ratio. III. Financial risk determines the return on assets.

IV. The cost of equity declines when the amount of leverage used by a firm rises.

I and II only

III and IV only II and IV only I and IV only I and III only

(2)

30. A levered firm is a company that has:

some debt in the capital structure.

None of these.

Accounts Payable as the only liability on the balance sheet. All of these.

all equity in the capital structure.

(2)

31. The use of personal borrowing to change the overall amount of financial

leverage to which an individual is exposed is called:

homemade leverage.

dividend recapture. personal offset.

private debt placement.

the weighted average cost of capital.

(2)

32. MM Proposition I without taxes is used to illustrate:

that one capital structure is as good as another.

All of these.

capital structure changes have no effect on stockholders' welfare.

the value of an unlevered firm equals that of a levered firm. leverage does not affect the value of the firm.

(2)

33. A firm has debt of $5,000, equity of $16,000, a leveraged value of $8,900,

a cost of debt of 8%, a cost of equity of 12%, and a tax rate of 34%. What is the firm's weighted average cost of capital?

11.05%

8.87% 7.94% 7.29% 10.40%

WACC = [($16k ÷ $21k) × .12] + [($5k ÷ $21k) × .08 × (1 - .34) = .091429 + .012571 = .1040 = 10.40%

(2)

34. The Winter Wear Company has expected earnings before interest and

taxes of $2,100, an unlevered cost of capital of 14% and a tax rate of 34%. The company also has $2,800 of debt that carries a 7% coupon. The debt is selling at par value. What is the value of this firm?

$10,852

$12,054 $9,900

$11,748 $12,700

VU = [$2,100 × (1 - .34)] ÷ .14 = $9,900; VL = $9,900 + (.34 × $2,800) = $10,852

(2)

35. The costs of avoiding a bankruptcy filing by a financially distressed firm

are classified as _____ costs.

capital structure

flotation direct bankruptcy indirect bankruptcy financial solvency

(2)

36. Gail's Dance Studio is currently an all equity firm that has 80,000 shares

of stock outstanding with a market price of $42 a share. The current cost of equity is 12% and the tax rate is 34%. Gail is considering adding $1 million of debt with a coupon rate of 8% to her capital structure. The debt will be sold at par value. What is the levered value of the equity?

$3.7 million

$2.4 million $3.9 million $2.7 million $3.3 million

VL = (80,000 × $42) + (.34 × $1m) = $3.36m + .34m = $3.7m; VE = $3.7m - $1m = $2.7m

(2)

37. In a world with taxes and financial distress, when a firm is operating with

the optimal capital structure:

I. the debt-equity ratio will also be optimal.

II. the weighted average cost of capital will be at its minimal point. III. the required return on assets will be at its maximum point.

IV. the increased benefit from additional debt is equal to the increased bankruptcy costs of that debt.

II, III, and IV only

II and III only I and II only I, II, and IV only I and IV only

(2)

38. A firm has a debt-to-equity ratio of 1. Its cost of equity is 16%, and its

cost of debt is 8%. If the corporate tax rate is 25%, what would the cost of equity be if the debt-to-equity ratio were 0?

12.57%

None of these. 13.33% 11.11% 16.00%

Rs = Ro + (B/S)(1 - Tc)( Ro - rB )

.16 = Ro + (1) (1 - .25) (Ro - .08) .16 = ro + .75ro - .06 .22 = 1.75Ro Ro = 12.57%

(2)

39. Which of the following is true?

Investors will generally view an increase in debt as a positive sign for the firm's value.

Rational firms raise debt levels when profits are expected to decline.

Rational investors are likely to infer a higher firm value from a zero debt level.

A firm with low anticipated profit will likely take on a high level of debt.

A successful firm will probably take on zero debt.

(2)

40. Although the use of debt provides tax benefits to the firm, debt also puts

pressure on the firm to:

meet both interest and dividend payments which when met increase the firm cash flow.

None of these.

meet interest and principal payments which, if not met, can put the company into financial distress.

meet increased tax payments thereby increasing firm value.

(2)

make dividend payments which if not met can put the company into financial distress.

41. A general rule for managers to follow is to set the firm's capital structure

such that:

the firm's value is minimized.

the firm's bondholders are made well off. the firms suppliers of raw materials are satisfied. the firms dividend payout is maximized. the firm's value is maximized.

(2)

42. The reason that MM Proposition I does not hold in the presence of

corporate taxation is because:

dividends are no longer relevant with taxes.

levered firms pay less taxes compared with identical unlevered firms.

bondholders require higher rates of return compared with stockholders.

All of these.

earnings per share are no longer relevant with taxes.

(2)

43. Bigelow, Inc. has a cost of equity of 13.56% and a pre-tax cost of debt of

7%. The required return on the assets is 11%. What is the firm's debt-equity ratio based on MM Proposition II with no taxes?

.72 .60 .75 .80 .64

.1356 = .11 + (.11 - .07) × D/E; D/E = .64

(2)

44. The proposition that the value of the firm is independent of its capital structure is called:

MM Proposition II.

MM Proposition I.

the capital asset pricing model. the efficient markets hypothesis. the law of one price.

(2)

45. Salmon Inc. has debt with both a face and a market value of $3,000. This

debt has a coupon rate of 7% and pays interest annually. The expected earnings before interest and taxes is $1,200, the tax rate is 34%, and the unlevered cost of capital is 12%. What is the firm's cost of equity?

13.25%

13.89% 13.92% 14.14% 14.25%

VU = [EBIT × (1 - Tc)] ÷ RU = [$1,200 × (1- .34)] ÷.12 = $6,600 VL = VU + (Tc × D) = $6,600 + (.34 × $3,000) = $7,620

VL - VD = VE = $7,620 - $3,000 = $4,620 RE = RU + (RU - RD) × D/E × (1 - TC) = .12 + [(.12 - .07) × ($3,000 ÷ $4,620) × (1 - .34)] = .12 + .02143 = .14143 = 14.14%

(2)

46. A key assumption of MM's Proposition I without taxes is:

All of these.

that financial leverage increases risk.

that individuals must be able to borrow on their own account at rates equal to the firm.

managers are acting to maximize the value of the firm.

(2)

that individuals can borrow on their own account at rates less than the firm.

47. The proposition that the cost of equity is a positive linear function of

capital structure is called:

MM Proposition II.

the efficient markets hypothesis. the capital asset pricing model. MM Proposition I. the law of one price.

(2)

48. The interest tax shield has no value for a firm when:

I. the tax rate is equal to zero.

II. the debt-equity ratio is exactly equal to 1. III. the firm is unlevered.

IV. a firm elects 100% equity as its capital structure.

II, III, and IV only

I and III only I, III, and IV only I, II, and IV only

II and IV only

(2)

49. Joe's Leisure Time Sports is an unlevered firm with an after-tax net

income of $86,000. The unlevered cost of capital is 10% and the tax rate is 34%. What is the value of this firm?

$781,818

$946,000 $567,600 $1,152,400 $860,000

VU = $86,000 ÷ .10 = $860,000

(2)

50. The firm's capital structure refers to:

how much cash the firm holds.

the mix of debt and equity used to finance the firm's assets. the way a firm invests its assets. the amount of dividends a firm pays. the amount of capital in the firm.

(0)

51. Covenants restricting the use of leasing and additional borrowings

primarily protect:

None of these.

→

the debtholders from the transfer of assets. the equityholders from added risk of default.

the debtholders from the added risk of dilution of their claims. the management from having to pay agency costs

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