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1.d

If a firm does not have any debt in its capital structure, its equity is then called: levered equity unlevered equity riskless equity risky equity none of the above Which of the following statements is FALSE? Modigliani and Miller argue that capital structure affects firm value even in a perfect market. We should not be discounting the cash flows of a firm that has leverage in its capital structure at the same discount rate that we use for firms with no debt in their capital structure. When a firm has leverage in its capital structure, the return required by investors will increase as investors want to protect themselves for the fact that the firm's equity is now riskier. Even if there is no default risk for a firm, the risk of the firm's equity will always go up if the firm has leverage in its capital structure. None of the above is false Assume that Toll Industries currently has no leverage in its capital structure. The firm has an equity cost of capital of 15%. Toll is thinking about borrowing money at a cost of 5% to repurchase its own stock in the stock market. Assume perfect capital markets. If Toll borrowed up to the point where its debt-to-firm value ratio became 30%, then the levered cost of equity of Toll would be closest to: 8.04% 9.27% 15.27% 19.29% None of the above Consider a company that issued $150 million in permanent debt (at par) that has an annual coupon rate of 5%. The company is going to pay only interest on this debt. Assume a corporate tax rate of 20% for the company. The present value of the company's annual interest tax shield is closest to: $1.5 million $15 million $30 million $50 million None of the above