The depreciation tax shield is defined as the cash flow created by:

a. The initial purchase of a depreciable fixed asset.

b. The sale of a depreciated fixed asset.

c. Any reduction in the marginal tax rate as a result of an increase in the depreciation expense.

d. The tax savings which result from the depreciation expense.

Which of the following is not true about equity and debt?

a. Interest payments for debt are tax-deductible for the corporation. Dividend of stocks is not tax-deductible for the corporation but tax-deductible for investors of the firm.

b. Nonpayment of interest may result in creditors forcing the firm into bankruptcy. Therefore, firms should always issue equity instead of debt to finance their growing opportunities.

c. Equity holders control the firm through voting rights and debt holders use the loan contracts to protect themselves.

d. Equity holders are protected by limited liability and their claim on firm value is the residual amount that remains after the debt holders are paid.

A firm's cost of debt:

a. Increases when the firm's bond rating increases.

b. Is inversely related to market rates.

c. Increases as the tax rate increases.

d. Is the interest rate the firm must pay on debt.

e. Is equal to the coupon rate on the firm's latest bond issue.

Which of the following is the best definition of financial distress costs?

a. Theory that a firm borrows up to the point where the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress.

b. The equity risk that comes from the financial policy (i.e., capital structure) of the firm.

c. The direct and indirect costs associated with going bankrupt or experiencing financial distress.

d. The difficulties of running a business that is experiencing financial distress.

e. The costs that are directly associated with bankruptcy, such as legal and administrative expenses.

You are buying a $25,000 car but you can only afford the down-payment of $5,000. Therefore you take a $20,000 auto loan. The terms of the loan call for monthly payments for 5 years at an 8.6% annual interest rate. What is the amount of monthly payment?

$296.67

$301.12

$287.71

$342.76

$366.05

$411.30

A company has sales of $80,000, costs of $48,000, depreciation of $20,000, and a 34% tax rate. Which one of the following is the correct method of computing the operating cash flow using the tax shield approach?

($80,000 - $48,000)(1 - .34) + ($20,000)(.34)

$80,000 - $48,000 - ($80,000 - $48,000 - $20,000)(.35)

($80,000 - $48,000 - $20,000) - ($80,000 - $48,000 - $20,000)(1 - .35)

($80,000 - $48,000)(.34) + ($20,000)(1 - .34)

($80,000 - $48,000 - $20,000) - ($80,000 - $48,000 - $20,000)(.35)