Question 1

Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk free rate and issues new equity to cover the remainder.In this situation,the cost of capital for the firm's levered equity is closest to:

Accepted Answer

A) PV(equity cash flows) = 11ea7e5a_6e8d_1f48_9a0a_a30885922997_TB1623_11 = $90,000 - $40,000 = $50,000 (value of levered equity)
So, $50,000 = 11ea7e5a_6e8d_1f49_9a0a_b3c26ac16a87_TB1623_11 So, 1 + x = 11ea7e5a_6e8d_1f4a_9a0a_a1da799436e9_TB1623_11 So, x = .23

Question 2

Use the information for the question(s) below.
Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%.
-The NPV for this project is closest to:

Accepted Answer

C) NPV = 11ea7e5a_6e8c_8301_9a0a_0108a93fc3b3_TB1623_11 - $80,000 = $10,000

Question 3

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the cost of capital for the firm's levered equity is closest to:

Accepted Answer

D) PV(equity cash flows) = 11ea7e5a_6e8c_d124_9a0a_619468489ab6_TB1623_11 = $90,000 - $80,000 = $10,000 (value of levered equity)
So, $10,000 = 11ea7e5a_6e8c_d125_9a0a_3d6ca9c9cb3a_TB1623_11 So, 1 + x = 11ea7e5a_6e8c_d126_9a0a_e1dd45fa8dad_TB1623_11 So, x = .95

Question 4

Equity in a firm with no debt is called

Accepted Answer

Equity in a firm with no debt is called unlevered equity. The term "unlevered" refers to the fact that the firm has no financial leverage, i.e. it has not borrowed any money. Therefore, the equity in such a firm is not subject to any financial risk arising from interest payments or principal repayments.

Question 5

Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk free rate and issues new equity to cover the remainder.In this situation,the cash flow that equity holders will receive in one year in a weak economy is closest to:

Accepted Answer

D) $90,000 - $40,000(1.05) = $48,000

Question 6

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the cash flow that equity holders will receive in one year in a strong economy is closest to:

Accepted Answer

C) $117,000 - $80,000(1.05) = $33,000

Question 7

Which of the following statements is correct?

Accepted Answer

Leverage increases the risk of equity even when there is no risk that the firm will default. This is because when the firms magnifies its returns through leverage, it also magnifies the losses. Therefore, the shareholders bear more risk.

Question 8

Two separate firms are considering investing in this project.Firm Unlevered plans to fund the entire $80,000 investment using equity,while Firm Levered plans to borrow $45,000 at the risk-free rate and use equity to finance the remainder of the initial investment.Construct a table detailing the percentage returns to the equity holders of both the levered and unlevered firms for both the weak and strong economy.

Accepted Answer

The answer of Two separate firms are considering investing in...

Question 9

Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk free rate and issues new equity to cover the remainder.In this situation,the cash flow that equity holders will receive in one year in a strong economy is closest to:

Accepted Answer

B) $117,000 - $40,000(1.05) = $75,000

Question 10

Two separate firms are considering investing in this project.Firm Unlevered plans to fund the entire $80,000 investment using equity,while Firm Levered plans to borrow $45,000 at the risk-free rate and use equity to finance the remainder of the initial investment.Calculate the expected returns for both the levered and unlevered firm.

Accepted Answer

The answer of Two separate firms are considering investing in...

Question 11

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the value of the firm's levered equity from the project is closest to:

Accepted Answer

B) PV(equity cash flows) = 11ea7e5a_6e8c_aa13_9a0a_155d77f9b679_TB1623_11 = $90,000 - $80,000 = $10,000

Question 12

When corporations raise funds from outside investors,they must choose which type of security to issue.The most common choices are financing through

Accepted Answer

The answer of When corporations raise funds from outside investors,they...

Question 13

Suppose that to raise the funds for the initial investment the firm borrows $45,000 at the risk free rate and issues new equity to cover the remainder.In this situation,calculate the value of the firm's levered equity from the project.What is the cost of capital for the firm's levered equity?

Accepted Answer

The answer of Suppose that to raise the funds for...

Question 14

Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk free rate and issues new equity to cover the remainder.In this situation,the value of the firm's levered equity from the project is closest to:

Accepted Answer

B) PV(equity cash flows) = 11ea7e5a_6e8c_f837_9a0a_d16454348898_TB1623_11 = $90,000 - $40,000 = $50,000

Question 15

Which of the following statements is false?

Accepted Answer

A) Leverage increases the risk of the equity of a firm.

Question 16

Which of the following statements is false?

Accepted Answer

A) Modigliani and Miller's conclusion went against the common view that even with perfect capital markets, leverage would affect a firm's value.

Question 17

Which of the following statements is false?

Accepted Answer

C) The project's NPV represents the value to the existing shareholders of the firm created by the project.

Question 18

Suppose that to raise the funds for the initial investment,the project is sold to investors as an all-equity firm.The equity holders will receive the cash flows of the project in one year.The market value of the unlevered equity for this project is closest to:

Accepted Answer

B) PV(equity cash flows) = 11ea7e5a_6e8c_8302_9a0a_9be7c2a62eae_TB1623_11 = $90,000

Question 19

Equity in a firm with debt is called

Accepted Answer

Equity in a firm with debt is called levered equity because it is influenced by the level of debt the company has. This means that the shareholders' returns are dependent on both the company's profits and the interest payments on the debt.

Question 20

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the cash flow that equity holders will receive in one year in a weak economy is closest to:

Accepted Answer

A) $90,000 - $80,000(1.05) = $6,000

Quiz 17: Capital Structure in a Perfect Market

Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk free rate and issues new equity to cover the remainder.In this situation,the cost of capital for the firm's levered equity is closest to:

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the cost of capital for the firm's levered equity is closest to:

Equity in a firm with no debt is called

Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk free rate and issues new equity to cover the remainder.In this situation,the cash flow that equity holders will receive in one year in a weak economy is closest to:

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the cash flow that equity holders will receive in one year in a strong economy is closest to:

Which of the following statements is correct?

Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk free rate and issues new equity to cover the remainder.In this situation,the cash flow that equity holders will receive in one year in a strong economy is closest to:

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the value of the firm's levered equity from the project is closest to:

When corporations raise funds from outside investors,they must choose which type of security to issue.The most common choices are financing through

Suppose that to raise the funds for the initial investment the firm borrows $45,000 at the risk free rate and issues new equity to cover the remainder.In this situation,calculate the value of the firm's levered equity from the project.What is the cost of capital for the firm's levered equity?

Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk free rate and issues new equity to cover the remainder.In this situation,the value of the firm's levered equity from the project is closest to:

Which of the following statements is false?

Which of the following statements is false?

Which of the following statements is false?

Suppose that to raise the funds for the initial investment,the project is sold to investors as an all-equity firm.The equity holders will receive the cash flows of the project in one year.The market value of the unlevered equity for this project is closest to:

Equity in a firm with debt is called

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the cash flow that equity holders will receive in one year in a weak economy is closest to: