Deck 16: Assessing Long-Term Debt, Equity, and Capital Structure

Question 1

In M&M's perfect world, their theorem's two main propositions are referred to as which of the following?

A) active capital structure management
B) passive capital structure management
C) capital structure irrelevance assertion
D) capital structure relevance assertion

Answer 1

capital structure irrelevance assertion

Question 2

This is another name for debt in the capital structure.

A) active
B) leverage
C) passive
D) long position

Answer 2

leverage

Question 3

This is one of the most extreme examples of firm re-leveraging which occurs when someone uses a firm's debt capacity to buy out the majority of the firm's equity holders.

A) debt buyout
B) equity buyout
C) leveraged buyout
D) separation buyout

Answer 3

leveraged buyout

Question 4

This is the level of EBIT at which EPS will be equal for two different capital structures.

A) Break-even EBIT
B) Break-even EPS
C) Break-even capital structures
D) Break-even financial structures

Question 5

Which of the following makes this a true statement? In this slightly more realistic world with corporate taxes, managers can

A) minimize the firm's value by taking on as much debt as possible.
B) maximize the firm's value by taking on as much debt as possible.
C) maximize the firm's value by taking on as much equity as possible.
D) maximize the firm's value by financing only with debt.

Question 6

This type of bankruptcy involves a business liquidating their assets.

A) Chapter 7
B) Chapter 11
C) Chapter 13
D) Chapter 9

Question 7

Which of the following is NOT a feature of the "perfect world" in M&M's theorem for optimal capital structure?

A) No taxes
B) No chance of bankruptcy
C) Perfectly efficient markets
D) Assymmetric information sets for all participants

Question 8

This type of bankruptcy involves an attempt to allow the firm to reorganize the business under court supervision.

A) Chapter 7
B) Chapter 11
C) Chapter 13
D) Chapter 9

Question 9

Which of the following is a true statement?

A) A firm's cost of debt increases with the use of equity in the capital structure.
B) A firm's cost of equity increases with the use of equity in the capital structure.
C) A firm's cost of equity increases with the use of debt in the capital structure.
D) A firm's cost of equity decreases with the use of debt in the capital structure.

Question 10

This is a situation that arises when a firm's equity is close to worthless, and equityholders will prefer to invest in overly risky projects with a small chance of success rather than simply paying debtholders their regularly scheduled payments.

A) leverage problem
B) overinvestment problem
C) underinvestment problem
D) long position

Question 11

If a firm changes their capital structure by waiting until the firm requires additional capital to cover capital budgeting needs and then selling more of the type of claims they wish to increase, they are using this type of capital structure change.

A) active
B) passive
C) separation
D) supportive

Question 12

This is the condition in which a firm is near bankruptcy.

A) passive capital structure
B) active capital structure
C) financial distress
D) call position

Question 13

Which of the following is NOT a factor for determining whether to use the active or passive approach to capital structure changes?

A) How much the firm faces in flotation costs under the active management approach.
B) How much the firm faces in debt costs under the active management approach.
C) How quickly the firm is growing.
D) How strongly and how quickly they wish to change the capital structure.

Question 14

How can an investor leverage itself more than the firm?

A) by borrowing money and investing it in stock along with the money they started with
B) by buying the firm's bonds
C) by buying the firm's preferred stock
D) Investors cannot leverage themselves more than the firm.

Question 15

This is the rule under which claimants are paid in a Chapter 7 bankruptcy.

A) first come, first served
B) absolute priority
C) term structure priority
D) date due priority

Question 16

Which of the following is a true statement regarding Proposition I?

A) Vu in a world with taxes is going to be more than Vu in a world without taxes.
B) Vu in a world with taxes is going to be less than Vu in a world without taxes.
C) Vu in a world with taxes is going to be equal to Vu in a world without taxes.
D) Vu in a world with taxes cannot be compared to Vu in a world without taxes.

Question 17

If a firm changes their capital structure by immediately selling additional claims of one type of capital and using the proceeds to retire another kind of claims, they are using this type of capital structure change.

A) active
B) passive
C) separation
D) supportive

Question 18

This is the mix of debt and equity that a firm uses to finance its operations.

A) capital structure
B) capital management
C) separation structure
D) break even

Question 19

This is the assumption that decisions about which projects to fund are separate from the decisions about how to fund them.

A) break-even principle
B) capital structure principle
C) separation principle
D) long position principle

Question 20

Which of the following allows for two types of bankruptcy for which most businesses can file?

A) Securities Exchange Commission
B) Generally Accepted Accounting Principles
C) The Internal Revenue Service
D) The United States Bankruptcy Code

Question 21

Your company doesn't face any taxes and has $750 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) 3.76
B) 9.15
C) 14.17
D) 83.79

Question 22

Your company doesn't face any taxes and has $300 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the break-even EBIT?

A) $19,000,000
B) $21,200,000
C) $27,000,000
D) $30,000,000

Question 23

Suppose that a company's equity is currently selling for $55 per share and that there are 1 million shares outstanding. If the firm also has 50 thousand bonds outstanding, which are selling at 95 percent of par ($1,000), what are the firm's current capital structure weights for equity and debt respectively?

A) 50%, 50%
B) 53.66%, 46.34%
C) 52.38%, 47.62%
D) 36.67%, 63.33%

Question 24

Suppose that a company's equity is currently selling for $19 per share and that there are 3 million shares outstanding and 10 thousand bonds outstanding, which are selling at 100 percent of par ($1,000). If the firm was considering an active change to their capital structure so that the firm would have a D/E of 0.5, which type of security (stocks or bonds) would they need to sell to accomplish this, and how much would they have to sell?

A) $12,333,333 in new debt
B) $1,755,400 in new debt
C) $12,328,000 in new equity
D) $1,755,400 in new equity

Question 25

This is a situation that arises when a firm's equity is close to worthless, and equityholders will prefer to not invest in safe projects.

A) leverage problem
B) overinvestment problem
C) underinvestment problem
D) long position

Question 26

Suppose that a company's equity is currently selling for $45 per share and that there are 1 million shares outstanding. If the firm also has 7 thousand bonds outstanding, which are selling at 97 percent of par ($1,000), what are the firm's current capital structure weights for equity and debt respectively?

A) 50%, 50%
B) 86.89%, 13.11%
C) 12.50%, 87.50%
D) 31.69%, 68.31%

Question 27

Which of the following is a true statement?

A) Sectors of the U.S. economy that tend to have quite variable income streams also carry the highest D/E ratios.
B) Sectors of the U.S. economy that tend to have quite variable income streams also carry the lowest D/E ratios.
C) Conglomerates tend to have high, unstable income streams.
D) Utilities have variable income streams and carry low D/E ratios.

Question 28

Your company doesn't face any taxes and has $150 million in assets, currently financed entirely with equity. Equity is worth $8 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 25-percent debt capital structure, and has determined that they would have to pay a 12 percent yield on perpetual debt in either event. What will be the break-even EBIT?

A) $18 million
B) $27.5 million
C) $32.5 million
D) $40 million

Question 29

Your company doesn't face any taxes and has $200 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 40-percent debt capital structure, and has determined that they would have to pay an 8 percent yield on perpetual debt in either event. What will be the break-even EBIT?

A) $13.6 million
B) $15 million
C) $16 million
D) $20 million

Question 30

Suppose that a company's equity is currently selling for $22 per share and that there are 4 million shares outstanding and 30 thousand bonds outstanding, which are selling at 101 percent of par ($1,000). If the firm was considering an active change to their capital structure so that the firm would have a D/E of 0.9, which type of security (stocks or bonds) would they need to sell to accomplish this, and how much would they have to sell?

A) $25,736,842 in new debt
B) $10,434,060 in new debt
C) $10,434,060 in new equity
D) $25,742,080 in new equity

Question 31

Your company doesn't face any taxes and has $500 million in assets, currently financed entirely with equity. Equity is worth $40 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) 5.07
B) 9.78
C) 25.73
D) 95.68

Question 32

Your company doesn't face any taxes and has $250 million in assets, currently financed entirely with equity. Equity is worth $8 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 20-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $1.02
B) $1.42
C) $1.82
D) $2.00

Question 33

Suppose that a company's equity is currently selling for $20 per share and that there are 2 million shares outstanding. If the firm also has 8 thousand bonds outstanding, which are selling at 99 percent of par ($1,000), what are the firm's current capital structure weights for equity and debt respectively?

A) 50%, 50%
B) 16.81%, 83.19%
C) 83.47%, 16.53%
D) 83.33%, 16.67%

Question 34

Your company doesn't face any taxes and has $750 million in assets, currently financed entirely with equity. Equity is worth $25 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 25-percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $1.06
B) $1.17
C) $2.27
D) $2.28

Question 35

Your company doesn't face any taxes and has $750 million in assets, currently financed entirely with equity. Equity is worth $25 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 25-percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the break-even level of EBIT?

A) $20 million
B) $23.75 million
C) $42.5 million
D) $75 million

Question 36

Your company doesn't face any taxes and has $800 million in assets, currently financed entirely with equity. Equity is worth $60 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 20-percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) 2.47
B) 5.36
C) 6.12
D) 28.76

Question 37

Your company doesn't face any taxes and has $200 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 40-percent debt capital structure, and has determined that they would have to pay an 8 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $0.75
B) $1.1325
C) $1.1925
D) $1.55

Question 38

Your company doesn't face any taxes and has $300 million in assets, currently financed entirely with equity. Equity is worth $15 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $1.21
B) $1.41
C) $1.55
D) $2.21

Question 39

Your company doesn't face any taxes and has $200 million in assets, currently financed entirely with equity. Equity is worth $25 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 40-percent debt capital structure, and has determined that they would have to pay a 7 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) 1.05
B) 1.56
C) 2.67
D) 7.15

Question 40

Suppose that a company's equity is currently selling for $30 per share and that there are 5 million shares outstanding. If the firm also has 20 thousand bonds outstanding, which are selling at 98 percent of par ($1,000), what are the firm's current capital structure weights for equity and debt respectively?

A) 50%, 50%
B) 88.44%, 11.56%
C) 99.60%, 0.40%
D) 88.23%, 11.77%

Question 41

Your company has a 25% tax rate and has $600 million in assets, currently financed entirely with equity. Equity is worth $20 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the break-even level of EBIT?

A) $16,758,621
B) $20,000,000
C) $25,000,000
D) $54,000,000

Question 42

Daddi Mac, Inc., doesn't face any taxes and has $250 million in assets, currently financed entirely with equity. Equity is worth $13 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $0.13
B) $0.21
C) $0.27
D) $0.16

Question 43

Your company faces a 34% tax rate and has $150 million in assets, currently financed entirely with equity. Equity is worth $8 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 25-percent debt capital structure, and has determined that they would have to pay a 12 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) 0.2890
B) 0.5376
C) 0.7983
D) 0.8935

Question 44

Daddi Mac, Inc., doesn't face any taxes and has $250 million in assets, currently financed entirely with equity. Equity is worth $20 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 30 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $0.33
B) $0.21
C) $0.37
D) $0.29

Question 45

Daddi Mac, Inc., doesn't face any taxes and has $250 million in assets, currently financed entirely with equity. Equity is worth $13 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $0.59
B) $0.41
C) $0.27
D) $0.19

Question 46

Suppose that Lil John Industries' equity is currently selling for $64 per share and that there are 1 million shares outstanding. If the firm also has 20 thousand bonds outstanding, which are selling at 108 percent of par ($1,000), what are the firm's current capital structure weights?

A) Weight of Equity = 25.23%; Weight of Debt = 74.77%
B) Weight of Equity = 84.77%; Weight of Debt = 15.23%
C) Weight of Equity = 74.77%; Weight of Debt = 25.23%
D) Weight of Equity = 32.23%; Weight of Debt = 67.77%

Question 47

Your company has a 38% tax rate and has $800 million in assets, currently financed entirely with equity. Equity is worth $60 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 20-percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the break-even level of EBIT?

A) $26.67 million
B) $50 million
C) $56.67 million
D) $80.1 million

Question 48

Your company faces a 25% tax rate and has $750 million in assets, currently financed entirely with equity. Equity is worth $25 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 25-percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) 0.6886
B) 0.8298
C) 1.1857
D) 1.4059

Question 49

Suppose that Papa Bell Inc.'s equity is currently selling for $30 per share, with 4 million shares outstanding. If the firm also has 70 thousand bonds outstanding, which are selling at 95 percent of par ($1,000), what are the firm's current capital structure weights?

A) Weight of Equity = 74.11%; Weight of Debt = 25.89%
B) Weight of Equity = 64.34%; Weight of Debt = 35.66%
C) Weight of Equity = 67.80%; Weight of Debt = 32.20%
D) Weight of Equity = 65.19%; Weight of Debt = 34.81%

Question 50

Your company faces a 30% tax rate and has $300 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) 0.1228
B) 0.2463
C) 0.3562
D) 0.4963

Question 51

Suppose that Papa Bell Inc.'s equity is currently selling for $95 per share, with 4 million shares outstanding. If the firm also has 80 thousand bonds outstanding, which are selling at 91.5 percent of par ($1,000), what are the firm's current capital structure weights?

A) Weight of Equity = 83.85%; Weight of Debt = 16.15%
B) Weight of Equity = 81.29%; Weight of Debt = 18.71%
C) Weight of Equity = 77.80%; Weight of Debt = 12.20%
D) Weight of Equity = 65.19%; Weight of Debt = 34.81%

Question 52

Your company faces a 34% tax rate and has $200 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 40-percent debt capital structure, and has determined that they would have to pay an 8 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $0.748
B) $0.7965
C) $0.946
D) $1.023

Question 53

Your company has a 40% tax rate and has $750 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $8.56
B) $8.84
C) $8.88
D) $25.67

Question 54

Your company has a 38% tax rate and has $800 million in assets, currently financed entirely with equity. Equity is worth $60 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 20-percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $1.98
B) $2.29
C) $2.36
D) $2.44

Question 55

Your company has a 25% tax rate and has $600 million in assets, currently financed entirely with equity. Equity is worth $20 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) 0.46
B) 0.49
C) 0.88
D) 1.16

Question 56

Your company faces a 34% tax rate and has $150 million in assets, currently financed entirely with equity. Equity is worth $8 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 25-percent debt capital structure, and has determined that they would have to pay a 12 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $0.49
B) $1.08
C) $1.31
D) $1.67

Question 57

Your company has a 40% tax rate and has $750 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) 2.26
B) 5.10
C) 10.05
D) 30.16

Question 58

Your company faces a 30% tax rate and has $300 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $0.30
B) $0.365
C) $0.44
D) $0.73

Question 59

Your company has a 38% tax rate and has $800 million in assets, currently financed entirely with equity. Equity is worth $60 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 20-percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) 1.53
B) 2.35
C) 3.32
D) 11.04

Question 60

Your company has a 25% tax rate and has $600 million in assets, currently financed entirely with equity. Equity is worth $20 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $0.32
B) $0.36
C) $0.38
D) $0.95

Question 61

HiLo, Inc., doesn't face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $7.24
B) $6.94
C) $5.59
D) $5.67

Question 62

HiLo, Inc., doesn't face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 40-percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the break-even level of EBIT?

A) $7.25 million
B) $7 million
C) $10 million
D) $11.2 million

Question 63

HiLo, Inc., doesn't face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $3.19
B) $3.94
C) $4.41
D) $5.67

Question 64

HiLo, Inc., doesn't face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $3.19
B) $4.00
C) $4.72
D) $5.97

Question 65

HiLo, Inc., doesn't face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) $7.91
B) $7.54
C) $6.59
D) $6.13

Question 66

HiLo, Inc., doesn't face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 15 percent yield on perpetual debt. What will be the break-even level of EBIT?

A) $11.2 million
B) $9.5 million
C) $13.0 million
D) $15.0 million

Question 67

Which of the following is incorrect with respect to leverage buyouts (LBOs)?

A) They originated in the 1960s and were originally known as bootstrap transactions which reflected the general consensus that the firm was, more or less, paying for its own acquisition.
B) The typical LBO uses a ratio of 70% debt to 30% equity but levels of debt can reach much higher.
C) LBOs are an extreme example of releveraging because debt is used to buy out the majority of the equityholders to gain control of the firm.
D) None of these statements is incorrect.

Question 68

No Nuns Cos. has a 20 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $80 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 20 percent debt capital structure, and has determined that they would have to pay an 7 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if the firm switches to the proposed capital structure?

A) $1.17
B) $0.92
C) $0.81
D) $1.06

Question 69

HiLo, Inc., faces a 38% tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $2.33
B) $3.68
C) $4.17
D) $4.91

Question 70

Daddi Mac, Inc., doesn't face any taxes and has $250 million in assets, currently financed entirely with equity. Equity is worth $13 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) $0.28
B) $0.33
C) $0..41
D) $0.11

Question 71

Daddi Mac, Inc., doesn't face any taxes and has $250 million in assets, currently financed entirely with equity. Equity is worth $13 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) $0.33
B) $0.26
C) $0.21
D) $0.16

Question 72

Daddi Mac, Inc., doesn't face any taxes and has $250 million in assets, currently financed entirely with equity. Equity is worth $20 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 30 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the standard deviation in EPS if they switched to the proposed capital structure?

A) $0.37
B) $0.21
C) $0.36
D) $0.29

Question 73

No Nuns Cos. has a 20 percent tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $80 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 10 percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $6.27
B) $6.83
C) $7.17
D) $7.60

Question 74

No Nuns Cos. has a 20 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $80 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 20 percent debt capital structure, and has determined that they would have to pay a 7 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

A) $1.20
B) $1.04
C) $0.93
D) $1.29

Question 75

GTB, Inc., has a 34 percent tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 5 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) $1.03
B) $0.42
C) $0.62
D) $0.55

Question 76

When a stockholder's stake is worthless the firm runs the risk of ____________.

A) Underinvestment because there isn't much capital for investment
B) Overinvestment because there isn't much wealth at risk
C) Having bondholders invoke the Separation principle to obtain first rights on the firm's assets
D) None of these

Question 77

HiLo, Inc., doesn't face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the standard deviation in EPS if they switch to the proposed capital structure?

A) $4.12
B) $14.57
C) $15.82
D) $15.09

Question 78

The policy of changing the capital structure gradually over time by funding new capital projects disproportionately with the type of capital you want to increase in the capital structure is referred as ___________________.

A) Separation principle
B) Overinvestment problem
C) Passive capital structure management
D) Active captive structure management

Question 79

A situation that arises when a firm's equity is close to worthless, and equity holders will prefer to invest in overly risky projects with a small chance of success rather than simply paying debt holders their regularly schedule payments is referred to as _____________________.

A) Separation principle
B) Underinvestment problem
C) Overinvestment problem
D) Passive capital structure management

Question 80

All else the same, firms facing relatively high tax rates should ______________.

A) Use more debt
B) Use less debt
C) Have lower E/E ratios
D) None of these