QUESTION 27

A firm has a market value of equity of $30,000. It borrows $30,000 at 5%. If the return on equity is 20% and the tax rate is 40%, what is the firms WACC?

	A.	11.5%
	B.	12.5%
	C.	8.3%
	D.	18.4%

QUESTION 28

[Q29-Q33] Assume the M&M with corporate taxes. The corporate tax rate is 40%. Your firm is currently unlevered with 100% equity. As of now, the value of the firms equity is $400K, and the firms cost of capital is 10%. Assume that your firm can borrow at 4% from a bank. Suppose that you decided to lever up by reducing equity and increasing debt. As the result, your firm now has $250K in debt. Your firm plans to maintain this debt amount forever. What is the present value of the interest tax shield?

	A.	$40K
	B.	$100K
	C.	$160K
	D.	$80K

QUESTION 29

What is the value of the firm under the new capital structure? (Hint: Use the first M&M proposition with corporate taxes.)

	A.	$100K
	B.	$500K
	C.	$250K
	D.	$400K

QUESTION 30

What is the market value of equity under the new capital structure? (Hint: Use the balance sheet identity.)

	A.	$100K
	B.	$400K
	C.	$250K
	D.	$500K

QUESTION 31

What is the cost of equity under the new capital structure? (Hint: Use the second M&M proposition with corporate taxes.)

	A.	8%
	B.	13.6%
	C.	4%
	D.	10%

QUESTION 32

What is the WACC under the new capital structure?

	A.	8%
	B.	10%
	C.	13.6%
	D.	4%

QUESTION 33

The tradeoff theory suggests that with higher costs of financial distress, it is optimal for a firm to choose lower leverage.

True

False