8.a

b.

c.

d.

Wayne Enterprises is currently an all-equity firm with an equity cost of capital of 14%. Suppose that Wayne is planning to add leverage to its capital structure and has a target debt-to-equity ratio of 0.5. Assume a cost of debt of 6% for Wayne and a corporate tax rate of 20%. Further assume that Wayne's pre-tax WACC remains the same. The firm's after-tax WACC is then closest to: 13.6% 14.5% 15.4% 16.0% None of the above 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 Which of the following statements is FALSE? Because of the presence of the financial distress costs, firms choose very high levels of debt to take advantage of the interest tax shield. It is advisable for a firm to lower its level of debt in the presence of financial distress costs since higher debt levels are associated with higher financial distress costs. Two other forms of agency costs are reduced effort and excessive spending on perks. Overinvestment can be defined as the tendency of shareholders to invest in risky negative NPV projects. None of the above is false. A type of agency problem that results in shareholders not investing in positive NPV projects in the presence of financial distress costs is: asset substitution cashing in underinvestment cashing out none of the above