Deck 21: Dynamic Capital Structures and Corporate Valuation

Question 1

Refer to data for Glassmaker Corporation.What is Glassmaker's WACC,based on its current capital structure?

A) 9.02%
B) 9.50%
C) 9.83%
D) 10.01%
E) 11.29%

Answer 1

C

Question 2

MM showed that in a world without taxes,a firm's value is not affected by its capital structure.

Answer 2

True

Question 3

Refer to data for Glassmaker Corporation.Using the compressed adjusted present value model,what will Glassmaker's value of equity be if it successfully implements its planned changes in operations and capital structure? (Round your answer to the closest thousand dollars. )

A) $16,019,000
B) $17,111,000
C) $18,916,000
D) $22,111,000
E) $22,916,000

Answer 3

B

Question 4

Which of the following statements concerning the compressed adjusted present value (APV)model is NOT CORRECT?

A) The value of a growing tax shield is greater than the value of a constant tax shield.
B) For a given D/S,the levered cost of equity is greater in the compressed APV model than the levered cost of equity under MM's original (with tax)assumptions.
C) For a given D/S,the WACC is greater in the compressed APV model than the WACC under MM's original (with tax)assumptions.
D) The total value of the firm increases with the amount of debt.
E) The tax shields should be discounted at the cost of debt.

Question 5

The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.

Question 6

If the capital structure is stable,and free cash flows are expected to be growing at a constant rate at the horizon date,then the compressed adjusted present value model calculates the horizon value by discounting the post-horizon free cash flows and post-horizon expected future tax shields at the weighted average cost of capital.

Question 7

Using the data for Sallie's Sandwiches and the compressed adjusted present value model,what is the total value (in millions)?

A) $72.37
B) $73.99
C) $74.49
D) $75.81
E) $76.45

Question 8

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV)approach is most CORRECT?

A) The value of equity is calculated by discounting the horizon value,the tax shields,and the free cash flows at the cost of equity.
B) The value of operations is calculated by discounting the horizon value,the tax shields,and the free cash flows before the horizon date at the unlevered cost of equity.
C) The value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity.
D) The CAPV approach stands for the accounting pre-valuation approach.
E) The value of operations is calculated by discounting the horizon value,the tax shields,and the free cash flows at the cost of equity.

Question 9

MM showed that in a world with taxes,a firm's optimal capital structure would be almost 100% debt.

Question 10

Which of the following statements concerning the compressed adjusted present value (APV)model is NOT CORRECT?

A) The value of a growing tax shield is greater than the value of a constant tax shield.
B) For a given D/S,the levered cost of equity using the compressed APV model is greater than the levered cost of equity under MM's original (with tax)assumptions.
C) For a given D/S,the WACC in the compressed APV model is less than the WACC under MM's original (with tax)assumptions.
D) The total value of the firm increases with the amount of debt.
E) The tax shields should be discounted at the unlevered cost of equity.

Question 11

In the compressed adjusted present value model,the appropriate discount rate for the tax shield is the after-tax cost of debt.

Question 12

In the compressed adjusted present value model,the appropriate discount rate for the tax shield is the unlevered cost of equity.

Question 13

In the compressed adjusted present value model,the appropriate discount rate for the tax shield is the WACC.

Question 14

Which of the following statements concerning the compressed adjusted present value (APV)model is NOT CORRECT?

A) The value of a growing tax shield is greater than the value of a constant tax shield.
B) For a given D/S,the levered cost of equity in the compressed APV model is greater than the levered cost of equity under MM's original (with tax)assumptions.
C) For a given D/S,the WACC in the compressed APV model is greater than the WACC under MM's original (with tax)assumptions.
D) The total value of the firm is independent of the amount of debt it uses.
E) The tax shields should be discounted at the unlevered cost of equity.

Question 15

Refer to data for Kitto Electronics.According to the compressed adjusted present value model,what is Kitto's unlevered value?

A) $1,296,000
B) $1,440,000
C) $1,600,000
D) $1,760,000
E) $1,936,000

Question 16

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV)approach is most CORRECT?

A) The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt.
B) The horizon value is calculated by discounting the expected earnings at the WACC.
C) The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC.
D) The horizon value must always be more than 20 years in the future.
E) The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the levered cost of equity.

Question 17

Refer to data for Glassmaker Corporation.According to the compressed adjusted present value model,what discount rate should you use to discount Glassmaker's free cash flows and interest tax savings?

A) 10.01%
B) 10.06%
C) 11.29%
D) 11.44%
E) 13.49%

Question 18

In a world with no taxes,MM show that a firm's capital structure does not affect the firm's value.However,when taxes are considered,MM show a positive relationship between debt and value,i.e. ,its value rises as its debt is increased.

Question 19

According to MM,in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

Question 20

Using the data for Sallie's Sandwiches and the compressed adjusted present value model,what is the appropriate rate for use in discounting the free cash flows and the interest tax savings?

A) 12.0%
B) 13.9%
C) 14.4%
D) 16.0%
E) 16.9%

Question 21

Refer to data for Kitto Electronics.Using the compressed adjusted present value model,what is Kitto's value of equity?

A) $1,492,000
B) $1,529,300
C) $1,567,533
D) $1,606,721
E) $1,646,889

Question 22

The market value of Firm L's debt is $200,000 and its yield is 9%.The firm's equity has a market value of $300,000,its earnings are growing at a rate of 5%,and its tax rate is 40%.A similar firm with no debt has a cost of equity of 12%.Using the compressed adjusted present value model,what is Firm L's cost of equity?

A) 11.4%
B) 12.0%
C) 12.6%
D) 13.3%
E) 14.0%

Question 23

A local firm has debt worth $200,000,with a yield of 9%,and equity worth $300,000.It is growing at a 5% rate,and its tax rate is 40%.A similar firm with no debt has a cost of equity of 12%.Using the compressed adjusted present value model,what is the value of your firm's tax shield,i.e. ,how much value does the use of debt add?

A) $92,571
B) $102,857
C) $113,143
D) $124,457
E) $136,903

Question 24

Refer to data for Kitto Electronics.Using the compressed adjusted present value model,what is the value of Kitto's tax shield?

A) $156,385
B) $164,616
C) $173,280
D) $182,400
E) $192,000

Question 25

The market value of Firm L's debt is $200,000 and its yield is 9%.The firm's equity has a market value of $300,000,its earnings are growing at a 5% rate,and its tax rate is 40%.A similar firm with no debt has a cost of equity of 12%.Using the compressed adjusted present value model,what would Firm L's total value be if it had no debt?

A) $358,421
B) $377,286
C) $397,143
D) $417,000
E) $437,850