Question
Please help! I need help answering every single question. 1) Which of the following statements about capital structure is most correct? A. With increasing leverage,
Please help! I need help answering every single question.
1) Which of the following statements about capital structure is most correct?
A. With increasing leverage, the CCC at first increases, then hits a maximum and then begins to fall.
B. The capital structure that minimizes the firms CCC is also the capital structure that maximizes the firms value.
C. The cost of equity and the after-tax cost of debt rise at a constant rate over all values of the debt ratio.
D. Managers of large firms can usually identify the capital structure that maximizes the firms value.
E. Statements a and b are correct.
2) Which of the following statements about the CCC is most correct?
A. The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project.
B. The cost of debt used to calculate the corporate cost of capital is based on an average of the cost of debt already issued by the firm and the cost of new debt.
C. One problem with the CAPM approach to estimating the cost of equity capital is that beta can be calculated in different ways - there is no right beta.
D. The debt-cost-plus-risk-premium approach is the most sophisticated and objective method of estimating a firm's cost of equity capital.
E. The cost of equity capital is generally easier to measure than the cost of debt, which varies daily with interest rates.
3) Generic Health Services has a target capital structure of 30 percent debt and 70 percent equity. Its cost of debt estimate is 10 percent, and its cost of equity estimate is 16 percent. It pays federal, state, and local taxes at a 34 percent marginal rate. What is the firms corporate cost of capital?
A. 12.1 percent
B. 12.5 percent
C. 13.2 percent
D. 13.8 percent
E. 14.0 percent
4) Which of the following statements concerning capital structure theory is false?
A. The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of corporate debt.
B. Under MM with zero taxes, financial leverage has no effect on firm value.
C. Under MM with corporate taxes, the value of the levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt.
D. Under MM with corporate taxes, the cost of equity, R(Re), increases at a faster rate when debt is used than it does in the absence of taxes.
E. Under MM with corporate taxes, the CCC is minimized if it uses 100 percent debt financing.
5) Wyden Brothers uses the CAPM to calculate the cost of equity capital. The companys capital structure consists of common stock and debt. Which of the following events will reduce the companys CCC?
A. A reduction in the market risk premium.
B. An increase in the risk-free rate.
C. An increase in the companys beta.
D. An increase in expected inflation.
E. An increase in the flotation costs associated with issuing stock.
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