1. Question 11
2. If an individual wants to borrow with limited liability, he/she should

   1. invest in the equity of an unlevered firm.

   2. invest in the equity of a levered firm.

   3. borrow on his/her own account.

   4. invest in a risk-free asset like T-bills.

3. Question 12

   Although the use of debt provides tax benefits to the firm, debt also puts pressure on the firm to:

   I) meet interest and principal payments, which if not met can put the company into financial distress

   II) make dividend payments, which if not met can put the company into financial distress

   III) meet both interest and dividend payments, which when met increase the firm cash flow

   IV) meet increased tax payments, thereby increasing firm value

   1. I only

   2. II only

   3. II and III only

   4. III and IV only

   5. I and II only

4. Question 13

   What does "risk shifting" imply?

   1. When faced with bankruptcy, managers may make accounting changes to conceal the true extent of the problem.

   2. When faced with bankruptcy, managers tend to invest in high-risk, high-return projects.

   3. When faced with bankruptcy, managers invest in low risk projects to conserve capital.

   4. When faced with bankruptcy, managers do not invest more equity capital.

5. Question 14

   A firm has a total market value of $9 million while its debt has a market value of $4 million. What is the after-tax weighted average cost of capital if the before-tax cost of debt is 11 percent, the cost of equity is 18 percent, and the tax rate is 21percent?

   1. 11.03%

   2. 12.15%

   3. 12.68%

   4. 13.86%

   5. 14.32%

6. Question 15

   If a firm borrows $90 million for one year at an interest rate of 8.5 percent, what is the present value of the interest tax shield? Assume a 21 percent marginal corporate tax rate.

   1. $1.16 million

   2. $0.97 million

   3. $1.24 million

   4. $1.48 million

   5. $1.31 million