Question 1

The total amount available to payout to all the investors in Kroger in 2005 is closest to:

Accepted Answer

C)
 11ea7e60_15d6_cbbb_ba34_e144906ed9c3_TB1624_00

Question 2

Use the table for the question(s) below.
Consider the following income statement for Kroger Inc. (all figures in $ Millions):
 
-The interest rate tax shield for Kroger in 2006 is closest to:

Accepted Answer

D)
 11ea7e60_15d6_a4a7_ba34_9dc9da7d579e_TB1624_00

Question 3

The total amount available to payout to all the investors in Kroger in 2006 is closest to:

Accepted Answer

C)
 11ea7e60_15d6_cbba_ba34_b1affa0c3c4a_TB1624_00

Question 4

Use the information for the question(s) below.
Fly by Night Aviation (FBNA) expects to have net income next year of $24 million and interest expense of $3 million. FBNA's marginal corporate tax rate is 40%.
-IF FBNA increases leverage so that its interest expense rises by $1 million,then the amount its unlevered EBIT will change is closest to:

Accepted Answer

A) EBIT does not change with a change in interest expense.

Question 5

Use the following information to answer the question(s) below.
Wyatt Oil issued $100 million in perpetual debt (at par) with an annual coupon of 7%. Wyatt will pay interest only on this debt. Wyatt's marginal tax rate is expected to be 40% for the foreseeable future.
-The present value of Wyatt's annual interest tax shield is closest to:

Accepted Answer

C) Annual interest tax shield = Debt × Interest × Tax rate = $100 million × 7% × 40% = $2.8 million
PV Tax shield = 11ea7e60_15d7_b626_ba34_45b48777169c_TB1624_11 = 11ea7e60_15d7_b627_ba34_55b8d1aa5119_TB1624_11 = $40 million

Question 6

Use the following information to answer the question(s) below.
Wyatt Oil issued $100 million in perpetual debt (at par) with an annual coupon of 7%. Wyatt will pay interest only on this debt. Wyatt's marginal tax rate is expected to be 40% for the foreseeable future.
-Wyatt's annual interest tax shield is closest to:

Accepted Answer

A) Annual interest tax shield = Debt × Interest × Tax rate = $100 million × 7% × 40% = $2.8 million

Question 7

Use the table for the question(s) below.
Consider the following income statement for Kroger Inc. (all figures in $ Millions):
 
-Calculate the interest tax shield,the total amount available to payout to all the investors,and the income that would be available to equity holders if Kroger was not levered all for the year 2004.

Accepted Answer

The answer of Use the table for the question(s) below.
Consider...

Question 8

Use the following information to answer the question(s) below.
Wyatt Oil issued $100 million in perpetual debt (at par) with an annual coupon of 7%. Wyatt will pay interest only on this debt. Wyatt's marginal tax rate is expected to be 40% for the foreseeable future.
-Assume that five years have passed since Wyatt issued this debt.While tax rates have remained at 40%,interest rates have dropped so that Wyatt's current cost of debt capital is now only 4%.Wyatt's annual interest tax shield is now closest to:

Accepted Answer

A) Annual interest tax shield = Debt × Interest × Tax rate = $100 million × 7% × 40% = $2.8 million
Note that although interest rates have dropped, the coupon payment on the debt issue has not.

Question 9

Use the table for the question(s) below.
Consider the following income statement for Kroger Inc. (all figures in $ Millions):
 
-The interest rate tax shield for Kroger in 2004 is closest to:

Accepted Answer

C)
 11ea7e60_15d6_cbb9_ba34_6dc2f60d6167_TB1624_00

Question 10

Use the information for the question(s) below.
Rosewood Industries has EBIT of $450 million, interest expense of $175 million, and a corporate tax rate of 35%.
-The amount of Rosewood's interest tax shield is closest to:

Accepted Answer

D) Interest expense(τ_C) = 175(.35) = $61.25

Question 11

Use the information for the question(s) below.
Fly by Night Aviation (FBNA) expects to have net income next year of $24 million and interest expense of $3 million. FBNA's marginal corporate tax rate is 40%.
-IF FBNA increases leverage so that its interest expense rises by $1 million,then the amount its net income will change is closest to:

Accepted Answer

B) (EBIT - Interest Expense - chg IE)(1 - .4) = NI + chg NI
(-1)(chg IE)(.6) = chg NI
-1,000,000(.6) = -600,000
Or, -$1 million(1 - .6) = -$600,000

Question 12

Use the information for the question(s) below.
Fly by Night Aviation (FBNA) expects to have net income next year of $24 million and interest expense of $3 million. FBNA's marginal corporate tax rate is 40%.
-FBNA's EBIT is closest to:

Accepted Answer

A) EBIT = NI + Taxes + Interest expense
(EBIT - Interest Expense)(1 - .4) = NI
(EBIT - 3)(.6) = 24
EBIT = 24/.6 + 3 = $43

Question 13

Use the table for the question(s) below.
Consider the following income statement for Kroger Inc. (all figures in $ Millions):
 
-Assume that investors hold Google stock in retirement accounts that are free from personal taxes.Also assume that Google's current pre-tax WACC is 14%.If Google were to issue sufficient debt at a pre-tax cost of 7% to give them a debt to value ratio of 0.5,then the Google's after-tax WACC would be closest to:

Accepted Answer

B) r_WACC= 11ea7e60_15d7_6800_ba34_33fa0cebcc1e_TB1624_11 r_{e +} 11ea7e60_15d7_6801_ba34_cb0ded524008_TB1624_11 r_{d -} 11ea7e60_15d7_6802_ba34_37c67de545ff_TB1624_11 r_dT_c= 14% - 11ea7e60_15d7_6803_ba34_a9589def62a1_TB1624_11 (7%)(35%) = 12.775% Note that = 11ea7e60_15d7_6804_ba34_69a5a77f8b33_TB1624_11 r_{e +} 11ea7e60_15d7_8f15_ba34_73d39f497a00_TB1624_11 r_d is the pre-tax WACC.

Question 14

Use the information for the question(s) below.
Rosewood Industries has EBIT of $450 million, interest expense of $175 million, and a corporate tax rate of 35%.
-If Rosewood had no interest expense,its net income would be closest to:

Accepted Answer

D) Net income = (EBIT - Interest expense)(1 - τ_C) = (450 - 0)(1 - .35) = $292.50

Question 15

Which of the following statements is FALSE?

Accepted Answer

D) As Modigliani and Miller made clear in their original work, capital structure does not matter in perfect capital markets. Thus, if capital structure matters, then it must stem from a market imperfection.

Question 16

The income that would be available to equity holders in 2005 if Kroger was not levered is closest to:

Accepted Answer

D)
 11ea7e60_15d6_f2cd_ba34_a9a953c6b012_TB1624_00

Question 17

Use the information for the question(s) below.
Rosewood Industries has EBIT of $450 million, interest expense of $175 million, and a corporate tax rate of 35%.
-The total of Rosewood's net income and interest payments is closest to:

Accepted Answer

B) Net income + Interest expense = (EBIT - Interest expense)(1 - τ_C) = (450 - 175)(1 - .35) = $178.75 + $175 = $353.73

Question 18

Use the information for the question(s) below.
Rosewood Industries has EBIT of $450 million, interest expense of $175 million, and a corporate tax rate of 35%.
-Rosewood's net income is closest to:

Accepted Answer

B) Net income = (EBIT - Interest expense)(1 - τ_C) = (450 - 175)(1 - .35) = $178.75

Question 19

Use the table for the question(s) below.
Consider the following income statement for Kroger Inc. (all figures in $ Millions):
 
-The interest rate tax shield for Kroger in 2005 is closest to:

Accepted Answer

D)
 11ea7e60_15d6_a4a8_ba34_ddd225f854a9_TB1624_00

Question 20

The income that would be available to equity holders in 2006 if Kroger was not levered is closest to:

Accepted Answer

D)
 11ea7e60_15d6_f2cc_ba34_6b2a9ead4a79_TB1624_00

Quiz 15: Debt and Taxes

The total amount available to payout to all the investors in Kroger in 2005 is closest to:

Use the table for the question(s) below. Consider the following income statement for Kroger Inc. (all figures in $ Millions) : -The interest rate tax shield for Kroger in 2006 is closest to:

The total amount available to payout to all the investors in Kroger in 2006 is closest to:

Use the table for the question(s) below. Consider the following income statement for Kroger Inc. (all figures in $ Millions) : -The interest rate tax shield for Kroger in 2004 is closest to:

Use the information for the question(s) below. Rosewood Industries has EBIT of $450 million, interest expense of $175 million, and a corporate tax rate of 35%. -The amount of Rosewood's interest tax shield is closest to:

Use the information for the question(s) below. Fly by Night Aviation (FBNA) expects to have net income next year of $24 million and interest expense of $3 million. FBNA's marginal corporate tax rate is 40%. -FBNA's EBIT is closest to:

Use the information for the question(s) below. Rosewood Industries has EBIT of $450 million, interest expense of $175 million, and a corporate tax rate of 35%. -If Rosewood had no interest expense,its net income would be closest to:

Which of the following statements is FALSE?

The income that would be available to equity holders in 2005 if Kroger was not levered is closest to:

Use the information for the question(s) below. Rosewood Industries has EBIT of $450 million, interest expense of $175 million, and a corporate tax rate of 35%. -The total of Rosewood's net income and interest payments is closest to:

Use the information for the question(s) below. Rosewood Industries has EBIT of $450 million, interest expense of $175 million, and a corporate tax rate of 35%. -Rosewood's net income is closest to:

Use the table for the question(s) below. Consider the following income statement for Kroger Inc. (all figures in $ Millions) : -The interest rate tax shield for Kroger in 2005 is closest to:

The income that would be available to equity holders in 2006 if Kroger was not levered is closest to: