Deck 14: Capital Structure: Basic Concepts

Question 1

MM Proposition II without taxes implies that the required return on equity is:

A)a result of homemade leverage.
B)inversely related to the firm's debt-to-equity ratio.
C)a linear function of the firm's debt-to-equity ratio.
D)independent of the firm's capital structure.
E)a linear function of the market's rate of interest.

Answer 1

a linear function of the firm's debt-to-equity ratio.

Question 2

Which one of these represents the difference between the value of a levered and an unlevered firm?

A)R₀ - R_S
B)R × t_cB
C)V_{U +} R × t_cB
D)B/S(1 - t_c)( R₀ - R_S)
E)t_cB

Answer 2

t_cB

Question 3

Which of the following are given as reasons why individual investors may be able to borrow at the same rates as corporations?
I.Corporate loans must be negotiated and supervised.
II.Corporations often borrow using illiquid assets as collateral.
III.Individuals tend to borrow smaller amounts.
IV.Individuals can borrow on margin through a broker.

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

Answer 3

I,II,and IV only

Question 4

In an EPS-EBI graphical relationship,why does the debt line have a lower vertical intercept point than the no debt line?

A)The debt line has a negative slope while the no debt line has a positive slope.
B)The break-even point is higher with debt.
C)The debt line is horizontal while the no debt line has a positive slope.
D)With debt,a fixed interest charge is paid out of earnings.
E)The debt line has less of a slope than the no debt line.

Question 5

MM Proposition I without taxes illustrates that:

A)the value of an unlevered firm is less than that of a levered firm.
B)one capital structure is as good as any other capital structure.
C)corporate use of homemade leverage affects the value of the firm.
D)the debt-equity ratio affects the cost of equity capital.
E)the slope of the cost of equity function is equal to the rate of return on bonds.

Question 6

When comparing levered versus unlevered capital structures,leverage works to increase EPS for high levels of EBIT because interest payments on the debt:

A)vary with EBIT levels.
B)stay fixed,leaving more income to be distributed over fewer shares.
C)stay fixed,leaving less income to be distributed over fewer shares.
D)stay fixed,leaving less income to be distributed over more shares.
E)stay fixed,leaving more income to be distributed over more shares.

Question 7

In an EPS-EBI graphical relationship,the debt line and the no debt line intersect.Which of these are true at the intersection point?
I.The advantages of debt outweigh the disadvantages of debt.
II.The aftertax earnings of both capital structures are equal.
III.The earnings per share for both capital structures are equal.
IV.There is no advantage or disadvantage to debt.

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

Question 8

You are writing a comparison of an all-equity structure to a levered capital structure for a firm.It is accurate to state in this comparison that:

A)earnings per share will always be higher in the all-equity structure.
B)firms will only select the levered structure when individual rates on borrowed funds are lower than corporate rates.
C)leverage lowers shareholders' returns in bad times.
D)the all-equity firm has a greater advantage the higher the firm's earnings before interest.
E)leverage improves shareholders' returns regardless of the firm's level of earnings.

Question 9

In the absence of taxes,MM argues that:

A)no one capital structure for a firm is superior to any other capital structure for that firm.
B)the cost of equity for a levered firm is equal to the firm's unlevered WACC.
C)homemade leverage is insufficient to offset a firm's use of leverage.
D)the value of a levered firm exceeds the value of the unlevered firm.
E)the cost of equity decreases as the debt-equity ratio increases.

Question 10

Which one of these symbols is correctly matched with its definition?

A)t_c;Taxable corporate income
B)R_s;Rate of return on corporate savings
C)R₀;Unlevered cost of equity
D)R_WACC;Levered cost of equity
E)R_B;Weight of debt in the capital structure

Question 11

Which one of these argues than the value of a firm is independent of its capital structure?

A)MM Proposition I without taxes
B)MM Proposition II without taxes
C)Capital asset pricing model
D)MM Proposition I with taxes
E)MM Proposition II with taxes

Question 12

Given a world without taxes,R_WACC of an unlevered firm will equal:

A)R_S.
B)R_B.
C)R_0.
D)R_S - R_0.
E)R_s - R_B.

Question 13

Which one of these presents the idea that the cost of equity is a positive linear function of capital structure?

A)MM Proposition I without taxes
B)MM Proposition II with and without taxes
C)Capital asset pricing model
D)MM Proposition I with taxes
E)Homemade leverage

Question 14

Which one of these statements is correct?

A)Firms across all industries in the U.S.tend to have similar debt-to-equity ratios.
B)The banking industry tends to have the lowest debt-to-equity ratio of any U.S.industry.
C)Financial leverage lowers risk to equity holders.
D)MM Propositions ignore bankruptcy costs.
E)MM Propositions without taxes illustrate that a firm's overall cost of capital is affected by leverage.

Question 15

Leverage becomes a disadvantage to a firm as soon as the firm's earnings before interest:

A)become negative.
B)exceed the break-even point.
C)are taxed.
D)exceed the firm's unlevered earnings.
E)fall below the break-even point.

Question 16

A firm's capital structure refers to the:

A)division of a firm's assets into current and fixed assets.
B)amount shareholders have invested into the firm.
C)types of fixed assets owned by the firm.
D)mix of debt and equity used to finance the firm's assets.
E)amount of cash and cash equivalents held by a firm.

Question 17

Financial analysts value items in terms of their:

A)useful life.
B)tax benefits.
C)original cost.
D)depreciated value.
E)market value.

Question 18

A general rule for managers to follow is to establish a firm's capital structure such that the firm's:

A)cost of equity is minimized.
B)bondholders are fully secured.
C)value is maximized.
D)dividend payout is maximized.
E)assets are minimized.

Question 19

How is the value of equity determined for a market value balance sheet?

A)Summation of all the sale prices for shares of stock sold to shareholders
B)Summation of the market value of the firm's outstanding equity and debt securities
C)Summation of all shareholder investments in the firm plus the value of any retained earnings
D)Number of shares outstanding multiplied by the current price per share
E)Number of shares outstanding multiplied by the current price per share minus the amount of debt outstanding

Question 20

Which one of these statements is correct?

A)There is no condition known to date whereby a corporation can increase firm value through the use of leverage.
B)Corporations generally pay a lower cost on debt than do individuals due to their vast pool of liquid assets.
C)If individual's pay a higher cost to borrow than corporations do,then corporations can increase firm value by borrowing.
D)Margin accounts tend to be high interest rate sources of funds for individuals.
E)Corporations can increase firm value by borrowing provided their interest rate on debt exceeds that paid by individuals.

Question 21

MM Proposition I with tax is based on the concept that the:

A)optimal capital structure is the one that is totally financed with equity.
B)capital structure of the firm does not matter because investors can use homemade leverage.
C)firm is worse off levered than unlevered.
D)value of the firm increases as total debt increases because of the interest tax shield.
E)cost of equity increases as the debt-equity ratio of a firm increases.

Question 22

The interest tax shield has no value for a firm when the:
I.the tax rate is equal to zero.
II.the debt-equity ratio is exactly equal to 1.
III.the firm is unlevered.
IV.a firm elects an all-equity capital structure.

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

Question 23

Which one of these best supports the argument that leverage increases shareholder risk?

A)EPS is directly related to EBIT.
B)Individuals employ homemade leverage.
C)EPS variability increases when leverage is used.
D)Firm values rise with leverage in the presence of taxes.
E)The number of shares outstanding tends to decrease when leverage is used.

Question 24

The MM propositions would suggest that firms should prefer which one of these debt-to-equity ratios?

A).0
B).1
C).5
D).7
E).9

Question 25

The fact that interest payments on debt are tax deductible is a key factor in which of these propositions?

A)Both MM Proposition I and II with taxes
B)MM Proposition I without tax
C)MM Proposition II without tax
D)MM Proposition I with tax
E)MM Proposition II with tax

Question 26

What does the present value of the tax shield from debt formula assume?

A)The interest rate on the debt is less than cost of equity.
B)The debt will not be replaced when paid.
C)Interest on the debt is paid only when the debt matures.
D)The interest is paid semiannually.
E)The debt is perpetual.

Question 27

Why does MM Proposition I not hold in the presence of corporate taxation?

A)Bondholders require higher rates of return when their interest payments are taxed.
B)Dividends are no longer relevant when taxes are introduced.
C)A levered firm will pay less tax than the same firm unlevered.
D)The cost of equity increases with leverage.
E)The pretax cost of debt increases when taxes are considered .

Question 28

The interest tax shield is a key reason why:

A)the value of an unlevered firm is equal to the value of a levered firm.
B)the net cost of debt to a firm is generally less than the cost of equity.
C)firms tend to minimize their borrowing.
D)the cost of debt is equal to the cost of equity for a firm with a debt-to-equity ratio of 1.
E)firms prefer equity financing over debt financing.

Question 29

MM Proposition I with no tax supports the argument that:

A)business risk determines the return on assets.
B)it is completely irrelevant how a firm arranges its finances.
C)the cost of equity rises as leverage rises.
D)a firm should borrow money up to the point where the cost of debt equals the cost of equity.
E)financial risk is determined by the debt-equity ratio.

Question 30

Financial leverage impacts the performance of a firm by:

A)increasing the volatility of the firm's EBIT.
B)decreasing the volatility of the firm's EBIT.
C)decreasing the volatility of the firm's net income.
D)increasing the volatility of the firm's net income
E)lowering the firm's level of risk.

Question 31

Which of these statements apply MM Proposition II without taxes?
I.The expected return on equity is positively related to leverage.
II.The value of a firm cannot be changed by changing its capital structure.
III.Risk to equity holders increases with leverage.
IV.The expected return on equity is affected by the firm's debt-to-equity ratio.

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

Question 32

Which one of these events might cause the biggest challenge to the MM propositions?

A)An increase in the corporate tax rates
B)A decrease in the cost of debt
C)An increase in a firm's unlevered WACC
D)A new law requiring equal lending rates for all borrowers
E)A change in tax laws to treat interest and dividends equally

Question 33

Which of these proposes that the value of a levered firm exceeds the value of an unlevered firm by the present value of the tax shield?

A)MM Proposition I with and without taxes
B)MM Proposition I with tax
C)MM Proposition II with tax
D)MM Proposition I without tax
E)MM Proposition II without tax

Question 34

Bryan invested in Bryco stock when the firm was financed solely with equity.The firm is now utilizing debt in its capital structure.To unlever his position,Bryan needs to:

A)borrow some money and purchase additional shares of Bryco stock.
B)sell some shares of Bryco stock and loan it out.
C)sell some shares of Bryco stock and hold the proceeds in cash.
D)maintain his current position because the firm's use of leverage did not affect him.
E)sell some of his shares and also borrow money to increase his cash reserves.

Question 35

MM Proposition II is the proposition that:

A)supports the argument that the capital structure of a firm is irrelevant to the value of the firm.
B)a firm's cost of equity is a positive linear function of the firm's capital structure.
C)the cost of levered equity is determined solely by the return on debt,the debt-equity ratio,and the tax rate.
D)the cost of equity depends on the market value of the firm's assets.
E)supports the argument that the size of the pie does not depend on how the pie is sliced.

Question 36

MM Proposition I with tax supports the theory that:

A)the value of an unlevered firm is equal to the value of a levered firm plus the interest tax shield.
B)the value of a firm is inversely related to the amount of leverage used by the firm.
C)there is a positive linear relationship between the debt-to-equity ratio and firm value.
D)a firm's cost of capital is the same regardless of the mix of debt and equity used by the firm.
E)a firm's weighted average cost of capital increases as the debt-equity ratio of the firm increases.

Question 37

MM Proposition II with tax:

A)reaches the final conclusion that the capital structure decision is irrelevant to the value of a firm.
B)reveals how the interest tax shield relates to the value of a firm.
C)supports the argument that business risk is determined by the capital structure employed by a firm.
D)has the same general implications as MM Proposition II without taxes.
E)supports the argument that the cost of equity decreases as the debt-equity ratio increases.

Question 38

Which of these will appear on a market value balance sheet?
I.Original cost of fixed assets less any depreciation to date
II.Issue value of bonds
III.Current sales value of a firm's plant and equipment
IV.Current market value of the outstanding shares of stock

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

Question 39

A firm should select the capital structure which:

A)maximizes the value of the firm.
B)has no debt.
C)is fully levered.
D)minimizes taxes.
E)produces the highest cost of capital.

Question 40

Consider the pie models of corporate structure.What is the difference between the all-equity pie and the levered pie for a firm in the presence of taxes?

A)The size of the levered pie is smaller than the all-equity pie.
B)Taxes eat a slice of the levered pie but pass by the all-equity pie.
C)Both pies are the same size and are sliced identically.
D)Taxes eat a slice of both pies but take a larger slice of the all-equity pie.
E)The all-equity pie is smaller in size than the levered pie.

Question 41

An unlevered firm has a cost of capital of 14.6 percent and earnings before interest and taxes of $223,000.Assume the firm borrows $700,000 at a 7 percent rate of interest.The applicable tax rate is 34 percent.What is the value of the levered firm?

A)$1,946,082.19
B)$1,907,018.11
C)$1,246,082.19
D)$546,082.19
E)$547,018.11

Question 42

Dakota Co.has expected earnings before interest and taxes of $8,100,an unlevered cost of capital of 10 percent,and debt with both a book and face value of $14,000.The debt has an 8 coupon.The tax rate is 34 percent.What is the value of the firm?

A)$67,460
B)$53,460
C)$58,220
D)$61,000
E)$60,600

Question 43

Travel Express has a debt-to-equity ratio of .65.The pretax cost of debt is 8 percent while the unlevered cost of capital is 14 percent.What is the cost of equity if the tax rate is 34 percent?

A)7.52%
B)10.78%
C)16.57%
D)17.83%
E)18.30%

Question 44

Your firm has a $295,000 bond issue outstanding.These bonds have a 6.35 percent coupon,pay interest semiannually,and have a current market price equal to 101 percent of face value.What is the amount of the annual interest tax shield given a tax rate of 35 percent?

A)$6,125.50
B)$6,556.38
C)$12,176.13
D)$6,621.94
E)$12,297.89

Question 45

DL Trucking has a cost of equity of 14.4 percent and an unlevered cost of capital of 13 percent.The company has $20,000 in debt that is selling at par value.The levered value of the firm is $46,000 and the tax rate is 35 percent.What is the pretax cost of debt?

A)11.75%
B)10.20%
C)9.38%
D)11.20%
E)12.35%

Question 46

A levered firm has a pretax cost of debt of 8.5 percent and an unlevered cost of capital of 14 percent.The tax rate is 35 percent and the cost of equity is 15.89 percent.What is the debt-to-equity ratio?

A).55
B).45
C).51
D).47
E).53

Question 47

The Border Cafe has a cost of equity of 13.2 percent and a pretax cost of debt of 7.5 percent.The debt-equity ratio is .6 and the tax rate is 35 percent.What is the unlevered cost of capital?

A)11.60%
B)12.30%
C)11.97%
D)12.08%
E)10.80%

Question 48

You have decided to retire and want to sell your shares in a closely held,all equity firm.The other shareholders have agreed to have the firm borrow $954,200 to purchase your 6,500 shares of stock at the current market value.The total number of shares outstanding is 30,000.What will be the new price per share after the repurchase?

A)$146.80
B)$131.46
C)$148.07
D)$136.09
E)$141.41

Question 49

The Studio is currently an all equity firm that has 80,000 shares of stock outstanding with a market price of $42 a share.The current cost of equity is 12 percent and the tax rate is 34 percent.The firm is considering adding $1.25 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?

A)$2,535,000
B)$5,035,000
C)$3,785,000
D)$3,015,000
E)$4,015,000

Question 50

Sun Sports has an unlevered cost of capital of 11 percent,a cost of debt of 7 percent,and a tax rate of 34 percent.What is the target debt-equity ratio if the targeted levered cost of equity is 12.27 percent?

A).44
B).48
C).51
D).66
E).55

Question 51

Houston Tools has expected earnings before interest and taxes of $236,800,an unlevered cost of capital of 12.65 percent,and a tax rate of 35 percent.The company has $420,000 of debt that carries a 7 percent coupon.The debt is selling at par value.What is the value of this firm?

A)$796,758.89
B)$1,363,758.89
C)$1,216,758.89
D)$1,413,758.89
E)$1,636,758.89

Question 52

The Outlet has an unlevered cost of capital of 14.2 percent,a tax rate of 35 percent,and expected earnings before interest and taxes of $23,400.The company has $23,000 in bonds outstanding that have a coupon rate of 7 percent.The bonds are selling at par.What is the cost of equity?

A)14.31%
B)15.08%
C)14.59%
D)14.64%
E)15.37%

Question 53

The Pizza Shoppe has debt with both a face and a market value of $3,000.This debt has a coupon rate of 7 percent and pays interest annually.The expected earnings before interest and taxes are $1,200,the tax rate is 34 percent,and the unlevered cost of capital is 12 percent.What is the firm's cost of equity?

A)13.25%
B)13.89%
C)13.92%
D)14.14%
E)14.25%

Question 54

An all equity firm has a cost of capital of 15 percent.The firm is considering switching to a debt-equity ratio of .65 with a pretax cost of debt of 7.5 percent.What will the firm's cost of equity be if the firm makes the switch? Ignore taxes.

A)11.25%
B)12.21%
C)16.67%
D)19.88%
E)21.38%

Question 55

Sewing World had an all equity cost of capital of 12 percent.When the firm switched to being levered its cost of equity increased to 13.4 percent and its pretax cost of debt was 7.5 percent.What was the firm's debt-equity ratio after the switch? Ignore taxes.

A).31
B).33
C).47
D).45
E).17

Question 56

BL Plastics is an all equity firm that has 27,000 shares of stock outstanding.The company has decided to borrow $46,080 to buy out the shares of a deceased stockholder who holds 600 shares.What is the total value of this firm if you ignore taxes?

A)$2,122,560
B)$2,008,400
C)$2,073,600
D)$2,091,000
E)$2,103,440

Question 57

Ernie's has 3,500 bonds outstanding with a face value of $1,000 each and a coupon rate of 8.5 percent.What is the amount of the annual interest tax shield if the tax rate is 34 percent?

A)$98,500
B)$99,100
C)$100,750
D)$101,150
E)$102,250

Question 58

JL Lumber has a debt-equity ratio of .62.The firm's required return on assets is 12 percent and its current cost of equity is 15.60 percent.What is the firm's pretax cost of debt? Ignore taxes.

A)6.45%
B)6.03%
C)6.25%
D)6.40%
E)6.19%

Question 59

Leisure Vacations is an unlevered firm with an aftertax net income of $84,600.The unlevered cost of capital is 10 percent and the tax rate is 34 percent.What is the value of this firm?

A)$567,600
B)$781,818
C)$820,000
D)$846,000
E)$558,360

Question 60

Simpson's is an all equity firm that has 400,000 shares of stock outstanding.The company is in the process of borrowing $1.2 million at 8 percent interest to repurchase 50,000 shares of the firm's outstanding stock.What is the value of this firm if you ignore taxes?

A)$8.4 million
B)$9.2 million
C)$9.6 million
D)$9.8 million
E)$8.9 million

Question 61

CCL is an unlevered firm with a total market value of $448,000 with 28,000 shares of stock outstanding.The firm has expected EBIT of $27,500 if the economy is normal and $32,000 if the economy booms.The firm is considering a bond issue of $80,000 with an attached interest rate of 6 percent.The bond proceeds will be used to repurchase shares.The tax rate is 34 percent.What will the earnings per share be after the repurchase if the economy is normal?

A)$1.333
B)$1.860
C)$1.950
D)$1.038
E)$.65

Question 62

A firm has debt of $23,200,equity of $43,500,an aftertax cost of debt of 7.14 percent,a cost of equity of 12.8 percent,and a tax rate of 35 percent.What is the firm's weighted average cost of capital?

A)9.96%
B)7.94%
C)8.87%
D)10.83%
E)10.05%

Question 63

An unlevered firm has expected earnings of $2,401 and a market value of equity of $19,600.The firm is planning to issue $4,000 of debt at 6 percent interest and use the proceeds to repurchase shares at their current market value.Ignore taxes.What will be the cost of equity after the repurchase?

A)10.99%
B)11.08%
C)13.85%
D)13.97%
E)12.25%

Question 64

Dexter's is an unlevered firm with a total market value of $348,000 with 20,000 shares of stock outstanding.The firm has expected EBIT of $27,500 if the economy is normal and $32,000 if the economy booms.The firm is considering a bond issue of $69,600 with an attached interest rate of 6 percent.The bond proceeds will be used to repurchase shares.The tax rate is 35 percent.Compute the EPS after the repurchase for both a normal and a boom economy.What is the percentage increase in EPS if the economy booms rather than being normal?

A)18.78%
B)21.42%
C)19.84%
D)20.28%
E)19.29%

Question 65

Alto and Tenor have 15,000 shares of stock outstanding at a market price of $21 per share.The firm also has $140,000 of 6 percent bonds outstanding that are selling at par.The firm does not expect to pay taxes for the foreseeable future.The cost of equity is 14.7 percent.What is the value of R_WACC?

A)12.02%
B)7.38%
C)10.83%
D)8.64%
E)11.09%

Question 66

Durbin,Inc. ,is an unlevered firm with a total market value of $380,000 with 20,000 shares of stock outstanding.The firm has expected EBIT of $23,000 if the economy is normal and $30,000 if the economy booms.The firm is considering a bond issue of $85,500 with an attached interest rate of 5.5 percent.The bond proceeds will be used to repurchase shares.The tax rate is 34 percent.What will be the earnings per share after the repurchase if the economy booms?

A)$1.37
B)$1.63
C)$1.08
D)$1.45
E)$1.28

Question 67

A firm has a debt-to-equity ratio of .45 and a pretax cost of debt of 8 percent.The firm's WACC is 12.68 percent.What is the levered cost of equity if there are no taxes or other imperfections?

A)10.57%
B)13.58%
C)14.79%
D)18.03%
E)16.67%

Question 68

An unlevered firm has expected earnings of $33,062.50 and a market value of equity of $287,500.The firm is planning to issue $50,000 of debt at 7 percent interest and use the proceeds to repurchase shares at their current market value.Ignore taxes.What will be the cost of equity after the repurchase?

A)12.45%
B)13.58%
C)13.85%
D)12.04%
E)12.73%

Question 69

The Grist Mill has no debt.The firm has a total market value of $245,000 with 10,000 shares of stock outstanding.The firm has expected EBIT of $14,000 if the economy is normal and $17,000 if the economy booms.The firm is considering a bond issue of $49,000 with an attached interest rate of 8 percent.The bond proceeds will be used to repurchase shares.The tax rate is 34 percent.Compute the EPS after the repurchase for both a normal and a boom economy.What is the percentage increase in EPS if the economy booms rather than being normal?

A)18.78%
B)21.42%
C)19.84%
D)29.76%
E)19.29%

Question 70

A firm has zero debt and an overall cost of capital of 12.5 percent.The firm is considering a new capital structure with 55 percent debt at an interest rate of 6.5 percent.Assume there are no taxes or other imperfections.What will be the cost of equity capital of the levered firm?

A)18.47%
B)13.67%
C)15.80%
D)19.83%
E)21.16%

Question 71

Baker Breads has $13,000 of debt outstanding that is selling at par and has a coupon rate of 7 percent.The tax rate is 35 percent.What is the present value of the tax shield?

A)$318.50
B)$8,450.00
C)$910.00
D)$4,550.00
E)$4,760.50

Question 72

Marley's is an unlevered firm with a total market value of $180,000 with 4,000 shares of stock outstanding.The firm has expected EBIT of $6,500 if the economy is normal and $8,000 if the economy booms.The firm is considering a $67,500 bond issue with an attached interest rate of 6.5 percent.The bond proceeds will be used to repurchase shares.Ignore taxes.What will the earnings per share be after the repurchase if the economy booms?

A)$1.552
B)$1.610
C)$1.445
D)$3.200
E)$2.905

Question 73

Presley Cleaners has an all-equity capital structure with an equity value of $64,100.The expected earnings are $8,900 based on estimated sales of $60,000.The firm pays no taxes.What is the cost of capital?

A)13.88%
B)12.08%
C)14.83%
D)14.34%
E)12.37%

Question 74

The Border Crossing has no debt and a cost of capital of 11.2 percent.Assume the firm switches to a debt-to-equity ratio of .25 and issues bonds at par with a 6.3 percent coupon.What will be its cost of equity after the switch? Ignore taxes.

A)11.71%
B)12.33%
C)11.54%
D)9.98%
E)12.43%

Question 75

An unlevered firm has a cost of capital of 11.3 percent and a tax rate of 34 percent.The firm is considering a new capital structure with 60 percent debt.The interest rate on the debt would be 7.25 percent.What would be the firm's levered cost of capital if it adopts the new capital structure?

A)15.31%
B)14.78%
C)12.90%
D)12.30%
E)17.38%

Question 76

Marley's is an unlevered firm with a total market value of $190,000 with 5,000 shares of stock outstanding.The firm has expected EBIT of $7,500 if the economy is normal and $9,000 if the economy booms.The firm is considering a $76,000 bond issue with an attached interest rate of 4.5 percent.The bond proceeds will be used to repurchase shares.The tax rate is 35 percent.What will be the earnings per share after the repurchase if the economy booms?

A)$1.333
B)$1.860
C)$1.950
D)$1.038
E)$1.209

Question 77

A firm has a debt-to-equity ratio of 1.Its cost of equity is 16 percent and its pretax cost of debt is 8 percent.If there are no taxes or other imperfections,what would be its cost of equity if the debt-to-equity ratio were zero?

A)8%
B)10%
C)12%
D)14%
E)16%

Question 78

Delta Mills and Franklin Mill are identical firms except for their capital structures.Delta is an unlevered firm with $750,000 in stock.Franklin is a levered firm with $375,000 of stock and an interest rate on debt of 8 percent.Both Delta and Franklin have an expected EBIT of $90,000.Ignore taxes.Delta has a WACC of _____ percent and Franklin's WACC is _____ percent.

A)12;16
B)12;14
C)12;12
D)14;12
E)16;16

Question 79

A firm has a debt-to-equity ratio of .62.Its pretax cost of debt is 7.1 percent and its unlevered cost of capital is 13.8 percent.What is its levered cost of equity if there are no taxes or other imperfections?

A)9.65%
B)15.55%
C)18.20%
D)17.95%
E)20.45%

Question 80

Durbin,Inc. ,is an unlevered firm with a total market value of $365,000 with 20,000 shares of stock outstanding.The firm has expected EBIT of $24,000 if the economy is normal and $28,000 if the economy booms.The firm is considering a $73,000 bond issue with an attached interest rate of 5.5 percent.The bond proceeds will be used to repurchase shares.Ignore taxes.What will the earnings per share be after the repurchase if the economy booms?

A)$1.50
B)$1.61
C)$1.47
D)$1.75
E)$1.68