Question 2 2 pts Under what conditions would a policy of maximizing the value of the firm not be the same as a policy of maximizing shareholders' wealth? 1. If an issue of debt affects the value of existing debt 2. If the issue of debt increases the probability of bankruptcy 3. If the firm issues debt for the first time 4. If the beta of equity is positive 2 0 1 3 4 Question 3 2 pts Bombay Company's balance sheet is as follows: (NWC = net working capital; LTA = long term assets;D = debt; E= equity; V = firm value): Book values Market values NWC 200 500 D NWC 200 500 D 2300 2000 E LTA 2800 2500E 2500 2500 V 3000 3000 V According to MM's Proposition I corrected for taxes, what will be the change in company value if Bombay issues $200 of equity and uses it to make a permanent reduction in the company's debt? Assume a 35% tax rate. 1. +$70 LTA 2. -$70 3. +$ 140 4. $0 2 0 1 o 3 O 4 D Question 4 2 pts In Miller's model, when the quantity (1-TC)(1-TpE) = (1-Tp), then: 1. The firm should hold no debt 2. The value of the levered firm is greater than the value of the unlevered firm 3. The tax shield on debt is exactly offset by higher personal taxes paid on interest income 4. None of the above 2 o 3 Question 5 2 pts Although the use of debt provides tax benefits to the firm, debt also puts pressure on the firm to: Question 5 2 pts Although the use of debt provides tax benefits to the firm, debt also puts pressure on the firm to: 1. Meet interest and principal payments which if not met can put the company into financial distress 2. Make dividend payments which if not met can put the company into financial distress 3. Meet both interest and dividend payments which when met increase the firm cash flow 4. Meet increased tax payments thereby increasing firm value 4 O2 O 1 Question 6 2 pts What are some of the possible consequences of financial distress? Rondholders who face the recort of rotting only nart of their monov hack are likely to wront the Question 7 2 pts Financial slack includes: a. Cash b. Marketable securities c. Readily salable real assets d. Ready access to debt markets or bank loans 1. a. 2. b. and c. 3. a. and d. 4. all of the above 4 O1 3