1. Firms U and L each have the same amount of assets, EBIT, investor-supplied capital. Firm U is unleveraged, i.e., it is 100% equity financed. The market risk (beta) of firm U is 1.2. However, Firm L is financed with 50% debt and 50% equity. Which of the following statements is CORRECT a. The two companies have the same beta. b. Firm L has a lower beta than Firm U c. Firm L has a higher beta than Firm U. d. Firm L. has the higher EBIT than firm U. 2. Companies HD and LD have identical EBIT, tax rates, total assets, business risk. However, Company Hn has a higher debt to equity ratio and thus more interest expense than Company LD. Which of the following statements is CORRECT? a. Company LD always has a higher net income than Company HD b. Company HD has a higher cost of equity than Company LD c. Company LD has a higher cost of equity than Company HD. d. The two companies have the same cost of equity e. The two companies have different EBIT 3. Your firm has $500 million of total assets, its return on total assets (ROTA) is l 5%, and it currently has no debt in its capital structure (i.e., wd 0). The CEO is contemplating a recapitalization where it would issue debt at an after-tax cost of 10% and use the proceeds to buy back some of its common stock, such that the percentage of common equity in the capital structure (we) is I - wd. If the company goes ahead with the recapitalization, its operating income, the total assets, and tax rate would remain unchanged. Which of the following is most likely to occur as a result of the recapitalization? a. The ROTA would increase. b. The ROTA would decrease. c. The return on owners equity (ROB) would decline. d. The return on owners' equity (ROE) would increase. c. The ROE would not change. 4. A. B. C. D. Which of the following is the least associated with defensive tactics of corporate mergers? Poison pills Crown jewels Golden parachute Stock dividend E Whit knights 11 Page #1349