QUESTION 12

1. Which of the following statements about debt financing is most correct?

Debt financing can help managers use excess cash on perquisites.

Debt financing may make managers too risk-averse, therefore causing underinvestment in risky but positive NPV projects.

Debt financing can help managers use excess cash on non-value adding acquisitions.

All of the above statements are correct

QUESTION 39

1. There are two firms: Firm U and Firm L. Both firms have $100M total assets and $15M EBIT (earnings before interest and taxes). Firm U is an unleveraged firm without debt. Firm L is a leveraged firm with 50% of debt and 50% of common equity. The pre-tax cost of debt for Firm L is 8%. Both firms have 25% corporate tax rate. Calculate the return on equity (ROE) for firm U.

		9.60%
		11.25%
		16.50%
		18.20%

QUESTION 40

1. Based on the information from Question 39, whats the return on equity (ROE) for firm L

		9.60%
		11.25%
		16.50%
		18.20%

QUESTION 41

1. Based on the information from Question 39, whats the difference of the total dollars paid to all investors in Firm L and Firm U

		$3.2 million
		$4.8 million
		$5.8 million
		$1.0 million