Question 1

Naylor's is an all equity firm with 60,000 shares of stock outstanding at a market price of $50 a share.The company has earnings before interest and taxes of $102,000.Naylor's has decided to issue $750,000 of debt at 7.5 percent.The debt will be used to repurchase shares of the outstanding stock.Currently, you own 500 shares of Naylor's stock.How many shares of Naylor's stock will you continue to own if you unlever this position? Assume you can loan out funds at 7.5 percent interest.Ignore taxes.

Accepted Answer

A)  322 shares
B)  350 shares
C)  362 shares
D)  425 shares
E)  502 sharesF) B) and C)
G) C) and E)

Question 2

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005:

Accepted Answer

A)  permits creditors to file a prepack immediately after a firm files for bankruptcy protection.
B)  prevents creditors from submitting any reorganization plans.
C)  prevents firms from filing for bankruptcy protection more than once.
D)  permits key employee retention plans only if an employee has another job offer.
E)  allows firms to pay bonuses to all key employees to entice those employees to remain in the firm's employ.F) A) and D)
G) B) and E)

Question 3

A firm is technically insolvent when:

Accepted Answer

A)  it has a negative book value.
B)  total debt exceeds total equity.
C)  it is unable to meet its financial obligations.
D)  it files for bankruptcy protection.
E)  the market value of its stock is less than its book value.F) C) and E)
G) B) and E)

Question 4

The Pizza Palace has a cost of equity of 15.3 percent and an unlevered cost of capital of 11.8 percent.The company has $22,000 in debt that is selling at par value.The levered value of the firm is $41,000 and the tax rate is 34 percent.What is the pre-tax cost of debt?

Accepted Answer

A)  4.73 percent
B)  6.18 percent
C)  6.59 percent
D)  7.22 percent
E)  9.92 percentF) D) and E)
G) A) and B)

Question 5

Lamont Corp.uses no debt.The weighted average cost of capital is 11 percent.The current market value of the equity is $38 million and there are no taxes.What is EBIT?

Accepted Answer

A)  $3,423,000
B)  $3,508,600
C)  $3,781,100
D)  $3,898,700
E)  $4,180,000F) A) and B)
G) A) and C)

Question 6

Which one of the following is a direct bankruptcy cost?

Accepted Answer

A)  company CEO's time spent in bankruptcy court
B)  maintaining cash reserves
C)  maintaining a debt-equity ratio that is lower than the optimal ratio
D)  losing a key company employee
E)  paying an outside accountant fees to prepare bankruptcy reportsF) A) and B)
G) B) and E)

Question 7

You currently own 600 shares of JKL, Inc.JKL is an all equity firm that has 75,000 shares of stock outstanding at a market price of $40 a share.The company's earnings before interest and taxes are $140,000.JKL has decided to issue $1 million of debt at 8 percent interest.This debt will be used to repurchase shares of stock.How many shares of JKL stock must you sell to unlever your position if you can loan out funds at 8 percent interest?

Accepted Answer

A)  120 shares
B)  150 shares
C)  180 shares
D)  200 shares
E)  250 sharesF) A) and B)
G) C) and D)

Question 8

Jefferson & Daughter has a cost of equity of 14.6 percent and a pre-tax cost of debt of 7.8 percent.The required return on the assets is 13.2 percent.What is the firm's debt-equity ratio based on M & M II with no taxes?

Accepted Answer

A)  0.26
B)  0.33
C)  0.37
D)  0.43
E)  0.45F) A) and E)
G) B) and D)

Question 9

Hanover Tech is currently an all equity firm that has 320,000 shares of stock outstanding with a market price of $19 a share.The current cost of equity is 15.4 percent and the tax rate is 34 percent.The firm is considering adding $1.2 million of debt with a coupon rate of 8 percent to its capital structure.The debt will be sold at par value.What is the levered value of the equity?

Accepted Answer

A)  $5.209 million
B)  $5.288 million
C)  $5.312 million
D)  $6.512 million
E)  $6.708 millionF) A) and B)
G) A) and E)

Question 10

Which of the following are correct according to pecking-order theory?
I.Firms stockpile internally-generated cash.
II.There is an inverse relationship between a firm's profit level and its debt level.
III.Firms avoid external debt at all costs.
IV.A firm's capital structure is dictated by its need for external financing.

Accepted Answer

A)  I and III only
B)  II and IV only
C)  I, III, and IV only
D)  I, II, and IV only
E)  I, II, III, and IVF) B) and E)
G) B) and D)

Question 11

The business risk of a firm:

Accepted Answer

A)  depends on the firm's level of unsystematic risk.
B)  is inversely related to the required return on the firm's assets.
C)  is dependent upon the relative weights of the debt and equity used to finance the firm.
D)  has a positive relationship with the firm's cost of equity.
E)  has no relationship with the required return on a firm's assets according to M & M Proposition II.F) A) and D)
G) All of the above

Question 12

ABC Co.and XYZ Co.are identical firms in all respects except for their capital structure.ABC is all equity financed with $480,000 in stock.XYZ uses both stock and perpetual debt; its stock is worth $240,000 and the interest rate on its debt is 9 percent.Both firms expect EBIT to be $58,400.Ignore taxes.The cost of equity for ABC is _____ percent, and for XYZ it is ______ percent.

Accepted Answer

A)  12.17; 12.68
B)  12.17; 13.33
C)  12.17; 15.33
D)  12.29; 12.68
E)  12.29; 13.33F) A) and E)
G) A) and B)

Question 13

In general, the capital structures used by U.S.firms:

Accepted Answer

A)  tend to overweigh debt in relation to equity.
B)  generally result in debt-equity ratios between 0.45 and 0.60.
C)  are fairly standard for all SIC codes.
D)  tend to be those which maximize the use of the firm's available tax shelters.
E)  vary significantly across industries.F) All of the above
G) A) and B)

Question 14

Bob's Warehouse has a pre-tax cost of debt of 8.4 percent and an unlevered cost of capital of 14.6 percent.The firm's tax rate is 37 percent and the cost of equity is 18 percent.What is the firm's debt-equity ratio?

Accepted Answer

A)  0.72
B)  0.76
C)  0.79
D)  0.82
E)  0.87F) None of the above
G) A) and B)

Question 15

Based on the M & M propositions with and without taxes, how much time should a financial manager spend analyzing the capital structure of a firm? What if the analysis is based on the static theory?

Accepted Answer

Under either M & M scenario, a financial...

Question 16

The Jean Outlet is an all equity firm that has 146,000 shares of stock outstanding.The company has decided to borrow the $1.1 million to repurchase 7,500 shares of its stock from the estate of a deceased shareholder.What is the total value of the firm if you ignore taxes?

Accepted Answer

A)  $18,387,702
B)  $18,500,000
C)  $19,666,667
D)  $21,413,333
E)  $22,293,333F) A) and E)
G) B) and C)

Question 17

Jemisen's has expected earnings before interest and taxes of $6,200.Its unlevered cost of capital is 14 percent and its tax rate is 34 percent.The firm has debt with both a book and a face value of $2,500.This debt has a 9 percent coupon and pays interest annually.What is the firm's weighted average cost of capital?

Accepted Answer

A)  12.48 percent
B)  13.60 percent
C)  13.87 percent
D)  14.14 percent
E)  14.37 percentF) B) and E)
G) None of the above

Exam 16: Dividends and Payout Policy

Lamont Corp.uses no debt.The weighted average cost of capital is 11 percent.The current market value of the equity is $38 million and there are no taxes.What is EBIT?

Correct Answer
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Correct Answer
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The Jean Outlet is an all equity firm that has 146,000 shares of stock outstanding.The company has decided to borrow the $1.1 million to repurchase 7,500 shares of its stock from the estate of a deceased shareholder.What is the total value of the firm if you ignore taxes?

Correct Answer
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Which one of the following is a direct bankruptcy cost?

Correct Answer
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A firm is technically insolvent when:

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Bob's Warehouse has a pre-tax cost of debt of 8.4 percent and an unlevered cost of capital of 14.6 percent.The firm's tax rate is 37 percent and the cost of equity is 18 percent.What is the firm's debt-equity ratio?

Correct Answer
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Based on the M & M propositions with and without taxes, how much time should a financial manager spend analyzing the capital structure of a firm? What if the analysis is based on the static theory?

Correct Answer
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Under either M & M scenario, a financial...
View Answer

Correct Answer
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The business risk of a firm:

Correct Answer
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Correct Answer
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Jefferson & Daughter has a cost of equity of 14.6 percent and a pre-tax cost of debt of 7.8 percent.The required return on the assets is 13.2 percent.What is the firm's debt-equity ratio based on M & M II with no taxes?

Correct Answer
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In general, the capital structures used by U.S.firms:

Correct Answer
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The Pizza Palace has a cost of equity of 15.3 percent and an unlevered cost of capital of 11.8 percent.The company has $22,000 in debt that is selling at par value.The levered value of the firm is $41,000 and the tax rate is 34 percent.What is the pre-tax cost of debt?

Correct Answer
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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005:

Correct Answer
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Exam 16: Dividends and Payout Policy

Lamont Corp.uses no debt.The weighted average cost of capital is 11 percent.The current market value of the equity is $38 million and there are no taxes.What is EBIT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The Jean Outlet is an all equity firm that has 146,000 shares of stock outstanding.The company has decided to borrow the $1.1 million to repurchase 7,500 shares of its stock from the estate of a deceased shareholder.What is the total value of the firm if you ignore taxes?

Correct AnswerverifiedShow Answer

Which one of the following is a direct bankruptcy cost?

Correct AnswerverifiedShow Answer

A firm is technically insolvent when:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Bob's Warehouse has a pre-tax cost of debt of 8.4 percent and an unlevered cost of capital of 14.6 percent.The firm's tax rate is 37 percent and the cost of equity is 18 percent.What is the firm's debt-equity ratio?

Correct AnswerverifiedShow Answer

Based on the M & M propositions with and without taxes, how much time should a financial manager spend analyzing the capital structure of a firm? What if the analysis is based on the static theory?

Correct AnswerverifiedUnder either M & M scenario, a financial...View AnswerShow Answer

Correct AnswerverifiedShow Answer

The business risk of a firm:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Jefferson & Daughter has a cost of equity of 14.6 percent and a pre-tax cost of debt of 7.8 percent.The required return on the assets is 13.2 percent.What is the firm's debt-equity ratio based on M & M II with no taxes?

Correct AnswerverifiedShow Answer

In general, the capital structures used by U.S.firms:

Correct AnswerverifiedShow Answer

The Pizza Palace has a cost of equity of 15.3 percent and an unlevered cost of capital of 11.8 percent.The company has $22,000 in debt that is selling at par value.The levered value of the firm is $41,000 and the tax rate is 34 percent.What is the pre-tax cost of debt?

Correct AnswerverifiedShow Answer

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Under either M & M scenario, a financial...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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