Question 1

What is the value of the firm according to MM with corporate taxes?

Accepted Answer

A)   $475,875
B)   $528,750
C)   $587,500
D)   $646,250E) C) and D)
F) All of the above

Question 2

The graphical probability distribution of ROE for a firm that uses financial leverage would tend to be more peaked than the distribution if the firm used no leverage, other things held constant.

Accepted Answer

A) True 
 B)False

Question 3

Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

Accepted Answer

A) True 
 B)False

Question 4

DeLong Inc. has fixed operating costs of $470,000, variable costs of $2.80 per unit produced, and its products sell for $4.00 per unit. What is the company's breakeven point, i.e., at what unit sales volume would income equal costs?

Accepted Answer

A)   391,667
B)   411,250
C)   431,813
D)   453,403E) B) and D)
F) A) and B)

Question 5

Whenever a firm borrows money, it is using financial leverage.

Accepted Answer

A) True 
 B)False

Question 6

Although they operate in different industries, two firms have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk.

Accepted Answer

A) True 
 B)False

Question 7

In a perfect world of no taxes, what happens if the weighted average cost of capital (WACC)  is unaffected by the capital structure?

Accepted Answer

A)   MM proposition I holds.
B)   MM proposition II holds.
C)   SML is positively sloped.
D)   SML is negatively sloped.E) B) and D)
F) A) and D)

Question 8

The MM model with corporate taxes is the same as the Miller model, but with zero personal taxes.

Accepted Answer

A) True 
 B)False

Question 9

What is the major contribution of the Miller model?

Accepted Answer

A)   It demonstrates that personal taxes decrease the value of using corporate debt.
B)   It demonstrates that financial distress and agency costs reduce the value of using corporate debt.
C)   It demonstrates that equity costs increase with financial leverage.
D)   It demonstrates that debt costs increase with financial leverage.E) All of the above
F) A) and B)

Question 10

Which of the following statements is correct?

Accepted Answer

A)   If corporate tax rates were decreased while other things were held constant, and if the Modigliani-Miller tax-adjusted trade-off theory of capital structure were correct, this would tend to cause corporations to decrease their use of debt.
B)   A change in the personal tax rate should not affect firms' capital structure decisions.
C)   "Business risk" is differentiated from "financial risk" by the fact that financial risk reflects only the use of debt, while business risk reflects both the use of debt and such factors as sales variability, cost variability, and operating leverage.
D)   The optimal capital structure is the one that simultaneously (1)  maximizes the price of the firm's stock, (2)  minimizes its WACC, and (3)  maximizes its EPS.E) All of the above
F) A) and B)

Question 11

Firms HD and LD are identical except for their level of debt and the interest rates they pay on debt- HD has more debt and pays a higher interest rate on that debt. Based on the data given below, what is the difference between the two firms' ROEs?

Accepted Answer

A)   2.18%
B)   2.29%
C)   2.41%
D)   2.54%E) None of the above
F) C) and D)

Question 12

The Congress Company has identified two methods for producing playing cards. One method involves using a machine having a fixed cost of $10,000 and variable costs of $1.00 per deck of cards. The other method would use a less expensive machine (fixed cost = $5,000) , but with greater variable costs ($1.50 per deck of cards) . If the selling price per deck of cards is the same under each method, at what level of output will the two methods produce the same net operating income (EBIT) ?

Accepted Answer

A)   5,000 decks
B)   10,000 decks
C)   15,000 decks
D)   20,000 decksE) A) and B)
F) B) and D)

Question 13

What is the firm's cost of equity?

Accepted Answer

A)   23.3%
B)   25.9%
C)   28.8%
D)   32.0%E) A) and B)
F) B) and D)

Question 14

A firm's business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses.

Accepted Answer

A) True 
 B)False

Question 15

Lauterbach Corporation uses no debt, and has a beta of 1.10, and its tax rate of 40%. However, the CFO is considering moving to a capital structure with 30% debt and 70% equity. If the risk-free rate is
5) 0% and the market risk premium is 6.0%, by how much would the capital structure shift change the firm's cost of equity?

Accepted Answer

A)   1.53%
B)   1.70%
C)   1.87%
D)   2.05%E) B) and C)
F) None of the above

Question 16

A firm's financial policy drives its equity beta.

Accepted Answer

A) True 
 B)False

Question 17

Provided a firm does not use an extreme amount of debt, financial leverage typically affects both EPS
and EBIT, while operating leverage affects only EBIT.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements concerning the MM extension with growth is INCORRECT?

Accepted Answer

A)   The value of a growing tax shield is greater than the value of a constant tax shield.
B)   For a given D/E, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax)  assumptions.
C)   For a given D/E, the WACC 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) B) and C)
F) A) and C)

Question 19

Financial distress, agency costs, and direct and indirect bankruptcy costs affect a firm's target capital structure.

Accepted Answer

A) True 
 B)False

Question 20

With corporate taxes but no personal taxes, and without financial distress, what happens?

Accepted Answer

A)   An unlevered firm cannot benefit from increased leverage.
B)   Equity costs decrease with more debt financing.
C)   The optimal amount of leverage for a firm is 100% debt.
D)   Debt costs increase with financial leverage.E) None of the above
F) A) and B)

Exam 12: Capital Structure Decisions

Correct Answer
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Provided a firm does not use an extreme amount of debt, financial leverage typically affects both EPS and EBIT, while operating leverage affects only EBIT.

Correct Answer
verified

DeLong Inc. has fixed operating costs of $470,000, variable costs of $2.80 per unit produced, and its products sell for $4.00 per unit. What is the company's breakeven point, i.e., at what unit sales volume would income equal costs?

Correct Answer
verified

The MM model with corporate taxes is the same as the Miller model, but with zero personal taxes.

Correct Answer
verified

The graphical probability distribution of ROE for a firm that uses financial leverage would tend to be more peaked than the distribution if the firm used no leverage, other things held constant.

Correct Answer
verified

Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

Financial distress, agency costs, and direct and indirect bankruptcy costs affect a firm's target capital structure.

Correct Answer
verified

A firm's financial policy drives its equity beta.

Correct Answer
verified

Firms HD and LD are identical except for their level of debt and the interest rates they pay on debt- HD has more debt and pays a higher interest rate on that debt. Based on the data given below, what is the difference between the two firms' ROEs?

Correct Answer
verified

With corporate taxes but no personal taxes, and without financial distress, what happens?

Correct Answer
verified

In a perfect world of no taxes, what happens if the weighted average cost of capital (WACC) is unaffected by the capital structure?

Correct Answer
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What is the value of the firm according to MM with corporate taxes?

Correct Answer
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Which of the following statements concerning the MM extension with growth is INCORRECT?

Correct Answer
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Whenever a firm borrows money, it is using financial leverage.

Correct Answer
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What is the firm's cost of equity?

Correct Answer
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Correct Answer
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Although they operate in different industries, two firms have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk.

Correct Answer
verified

What is the major contribution of the Miller model?

Correct Answer
verified

A firm's business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses.

Correct Answer
verified

Exam 12: Capital Structure Decisions

Correct AnswerverifiedShow Answer

Provided a firm does not use an extreme amount of debt, financial leverage typically affects both EPS and EBIT, while operating leverage affects only EBIT.

Correct AnswerverifiedShow Answer

DeLong Inc. has fixed operating costs of $470,000, variable costs of $2.80 per unit produced, and its products sell for $4.00 per unit. What is the company's breakeven point, i.e., at what unit sales volume would income equal costs?

Correct AnswerverifiedShow Answer

The MM model with corporate taxes is the same as the Miller model, but with zero personal taxes.

Correct AnswerverifiedShow Answer

The graphical probability distribution of ROE for a firm that uses financial leverage would tend to be more peaked than the distribution if the firm used no leverage, other things held constant.

Correct AnswerverifiedShow Answer

Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Financial distress, agency costs, and direct and indirect bankruptcy costs affect a firm's target capital structure.

Correct AnswerverifiedShow Answer

A firm's financial policy drives its equity beta.

Correct AnswerverifiedShow Answer

Firms HD and LD are identical except for their level of debt and the interest rates they pay on debt- HD has more debt and pays a higher interest rate on that debt. Based on the data given below, what is the difference between the two firms' ROEs?

Correct AnswerverifiedShow Answer

With corporate taxes but no personal taxes, and without financial distress, what happens?

Correct AnswerverifiedShow Answer

In a perfect world of no taxes, what happens if the weighted average cost of capital (WACC) is unaffected by the capital structure?

Correct AnswerverifiedShow Answer

What is the value of the firm according to MM with corporate taxes?

Correct AnswerverifiedShow Answer

Which of the following statements concerning the MM extension with growth is INCORRECT?

Correct AnswerverifiedShow Answer

Whenever a firm borrows money, it is using financial leverage.

Correct AnswerverifiedShow Answer

What is the firm's cost of equity?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Although they operate in different industries, two firms have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk.

Correct AnswerverifiedShow Answer

What is the major contribution of the Miller model?

Correct AnswerverifiedShow Answer

A firm's business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses.

Correct AnswerverifiedShow Answer

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