1-

Required information

M & M Proposition I, with Taxes

Lollipop Corp. provides the following information:

EBIT = $286.50

Tax (T_C )= 35%

Debt= $810

Cost of debt capital = 10%

R_U = 15%

What is the value of the firm?

Multiple Choice

• $1,241.53

• $1,050.72

• $1,784.03

• $1,525.03

• $1,654.91

2- In 1887, Holmes and Watson Detection Agency has an EBIT of $1,000 and must make annual interest payment of $125. What is the Agency's degree of financial leverage?

Multiple Choice

• 0.875

• 0.76

• 0.89

• 1.25

• 1.14

3- Optimal Capital Structure

Managers should view the concept of the Optimal Capital Structure as all of the following, except:

Managers should view the concept of the Optimal Capital Structure as all of the following, except:

Multiple Choice

• Firms that have substantial tax shields from other sources, such as depreciation, will get less benefit from leverage.

• The static model is not capable of identifying a precise optimal capital structure.

• The tax benefit from leverage is more important to firms that are in a tax-paying position.

• Firms with less risk of experiencing financial distress will borrow less.

• The higher the tax rate, the greater the incentive to borrow.

4-Required information

Pecking order Theory

The pecking order theory implications include all of the following, except:

The pecking order theory implications include all of the following, except:

Multiple Choice

• Profitable firms use less debt.

• Companies will want financial slack.

• Profitable firms use more debt.

• No target capital structure.

• Management wants the ability to finance projects as they appear.