Question 1

The smaller the financial leverage of the firm, lower is the range (or variability) of its Earnings Per Share.

a. True

b. False

True

False

1 points

Question 2

Bike Inc.s capital structure contains 20 percent debt and 80 percent equity and the company pays 7 percent annual interest on its debt. Bike Inc.s stock has a beta of 1.0. Further, assume that the risk-free rate of interest equals 4 percent, and the expected return on the market portfolio equals 12 percent. The WACC for Bike Inc. will be _______ in the absence of taxes and will be ________ in the presence of a corporate marginal tax rate of 34%.

a. 11%; 10.52%

b. 13%; 12.31%

c. 9%; 8.25%

	a.	11%; 10.52%
	b.	9%; 8.25%
	c.	13%; 12.31%

1 points

Question 3

Costs associated with the requirement that management divert its attention away from strategically managing a corporation in favor of spending time with financial attorneys could be best described as

a.	direct bankruptcy costs.
b.	indirect bankruptcy costs.
c.	mangerial-shareholder related agency costs.
d.	none of the above.

	a.	mangerial-shareholder related agency costs.
	b.	indirect bankruptcy costs.
	c.	none of the above
	d.	direct bankruptcy costs.

1 points

Question 4

The Globe Incorporated has EBIT of $20 million for the current year. On the firm balance sheet, there is $80 million of debt outstanding that carries a coupon rate of 8 percent. Investors seek a return of 12 percent on the firm, and the firm has a corporate tax rate of 40%. What is the present value of the firms tax shields, assuming the firms debt is perpetual?

a.	$32,000,000
b.	$30,000,000
c.	$24,000,000
d.	$6,400,000

a.

$32,000,000

b.

$24,000,000

c.

$6,400,000

d.

$30,000,000

1 points

Question 5

The smaller the financial leverage of the firm, higher is its expected Earnings Per Share.

a. True

b. False

True

False

1 points

Question 6

The present value of the tax shield represents the difference in the value of the Levered firm over the all-equity firm.

a. True

b. False

True

False

1 points

Question 7

The proposition that the market value of the firm is independent of its capital structure is true under what set of assumptions:

a. No corporate taxes yet there is a chance of bankruptcy

b. Corporate tax rate between 10% to 15% yet there is no chance of bankruptcy

c. No corporate taxes and no chance of bankruptcy

	a.	No corporate taxes and no chance of bankruptcy
	b.	Corporate tax rate between 10% to 15% yet there is no chance of bankruptcy
	c.	No corporate taxes yet there is a chance of bankruptcy

1 points

Question 8

Molotov Cranberry Cocktail Corp finds that the value of the firm is equal to $200,000,000 with no debt. It knows that if it issues new debt, the value of the tax shield will be $4,000,000 while the value of the bankruptcy costs is $1,000,000. What will the value of Molotov be if it issues the debt?

a.	$900,000
b.	$203,000,000
c.	$102,000,000
d.	none of the above

a.

$203,000,000

b.

none of the above

c.

$102,000,000

d.

$900,000

1 points

Question 9

TransMetro Incorporated has EBIT of $1 million for the current year. On the firm balance sheet, there is $6 million of debt outstanding that carries a coupon rate of 15 percent. Investors seek a return of 20 percent on the firm, and the firm has a corporate tax rate of 40%. What is the present value of the firms tax shields?

a.	$2,000,000
b.	$2,200,000
c.	$2,400,000
d.	$2,700,000

a.

$2,200,000

b.

$2,400,000

c.

$2,700,000

d.

$2,000,000

1 points

Question 10

Given the presence of bankruptcy costs as well as corporate taxes with deductibility of interest for tax purposes, the optimal Debt to Equity ratio for a firm will be

a. Debt Equity of almost 100%

b. Debt/Equity ratio of 0%

c. Debt/Equity ratio between 0% and 100%

	a.	Debt Equity of almost 100%
	b.	Debt/Equity ratio between 0% and 100%
	c.	Debt/Equity ratio of 0%