10.a.

10.b

10.c.

10.d.

Which of the following statements is TRUE? When a firm conducts a recapitalization, its shareholders will capture the benefits of the interest tax shield immediately even though leverage reduces the total value of the firm's equity. The stock price always increases after a recapitalization is completed. An important similarity between debt and equity financing is that both interest and dividend payments must be made to avoid bankruptcy. Increasing leverage reduces the probability of bankruptcy. None of the above is true. Which of the following statements is FALSE? A benefit of using leverage in the capital structure is that it allows the original shareholders of the firm to retain their equity stake. The costs of financial distress reduce the value of the levered firm. The magnitude of the reduction increases with the probability of default, which in turn increases with the level of the debt. The interests of managers and other investors (shareholders and debt holders) in the firm may not always be fully aligned and thus managers may sometimes pursue their own personal interests. Another form of agency cost is the working capital substitution problem. None of the above is false Altona Inc. will introduce a new product to the market. Depending on how the product will do in the market, Altona estimates that the firm will have a value of either $90 million, $160 million, or $190 million next year, with equal probability for each of the three outcomes. Assume that 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 O and a cost of capital equal to the risk-free rate, which is currently 7%. Assume perfect capital markets. Suppose that if Altona defaults, the value of firm's assets will go down by 25% due to bankruptcy costs and suppose that Altona has zero-coupon debt with a $120 million face value that is due next year. The total value of Altona today with leverage and the present value of its financial distress costs are closest to $80 million and $2.5 million $121 million and $4.7 million $130 million and $7.0 million $145 million and $11.2 million Which of the following is NOT an indirect cost of bankruptcy? Fire sales of assets Loss of employees Loss of customers Loss of suppliers Loss of payables Which of the following statements is TRUE? When a firm conducts a recapitalization, its shareholders will capture the benefits of the interest tax shield immediately even though leverage reduces the total value of the firm's equity. The stock price always increases after a recapitalization is completed. An important similarity between debt and equity financing is that both interest and dividend payments must be made to avoid bankruptcy. Increasing leverage reduces the probability of bankruptcy. None of the above is true. Which of the following statements is FALSE? A benefit of using leverage in the capital structure is that it allows the original shareholders of the firm to retain their equity stake. The costs of financial distress reduce the value of the levered firm. The magnitude of the reduction increases with the probability of default, which in turn increases with the level of the debt. The interests of managers and other investors (shareholders and debt holders) in the firm may not always be fully aligned and thus managers may sometimes pursue their own personal interests. Another form of agency cost is the working capital substitution problem. None of the above is false Altona Inc. will introduce a new product to the market. Depending on how the product will do in the market, Altona estimates that the firm will have a value of either $90 million, $160 million, or $190 million next year, with equal probability for each of the three outcomes. Assume that 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 O and a cost of capital equal to the risk-free rate, which is currently 7%. Assume perfect capital markets. Suppose that if Altona defaults, the value of firm's assets will go down by 25% due to bankruptcy costs and suppose that Altona has zero-coupon debt with a $120 million face value that is due next year. The total value of Altona today with leverage and the present value of its financial distress costs are closest to $80 million and $2.5 million $121 million and $4.7 million $130 million and $7.0 million $145 million and $11.2 million Which of the following is NOT an indirect cost of bankruptcy? Fire sales of assets Loss of employees Loss of customers Loss of suppliers Loss of payables