1) As the case of Air Canada demonstrates, firms such as airlines whose future cash flows are unstable and highly sensitive to shocks in the economy run the risk of bankruptcy if they use ________ leverage.

A) zero

B) too little

C) too much

D) total

Answer:

2) Economic distress represents a significant decline in the value of ________, whether or not it experiences financial distress due to leverage.

A) a firm's liability

B) a firm's assets

C) a firm's equity

D) a firm's debts

Answer:

Use the information for the question(s) below.

Monsters Incorporated (MI) is ready to launch a new product. Depending upon the success of this product, MI will have a value of either $100 million, $150 million, or $191 million, with each outcome being equally likely. The cash flows are unrelated to the state of the economy (i.e. risk from the project is diversifiable) so that the project has a beta of 0 and a cost of capital equal to the risk-free rate, which is currently 5%. Assume that the capital markets are perfect.

3) The initial value of MI's equity without leverage is: Answer:

Explanation:

4) Suppose that MI has zero-coupon debt with a $125 million face value due next year. The initial value of MI's debt is : Answer:

Explanation:

5) Suppose that MI has zero-coupon debt with a $125 million face value due next year. The yield to maturity of MI's debt is: Answer:

Explanation:

6) Suppose that MI has zero-coupon debt with a $125 million face value due next year. The expected return of MI's debt is: Answer:

Explanation:

7) Suppose that MI has zero-coupon debt with a $125 million face value due next year. The initial value of MI's equity is closest to:

A) $30 million

B) $15 million

C) $29 million

D) $24 million

Answer: Explanation:

8) Suppose that MI has zero-coupon debt with a $125 million face value due next year. The total value of MI with leverage is:

Answer: Explanation: