Chapter 16

Chapter 16
1. The use of personal borrowing to change the overall amount of financial leverage to which an individual
is exposed is called:

A. homemade leverage.
B. dividend recapture.
C. the weighted average cost of capital.
D. private debt placement.
E. personal offset.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Ross - Chapter 16 #1
Section: 16.3
Topic: Homemade leverage

2. The proposition that the value of the firm is independent of its capital structure is called:

A. the capital asset pricing model.

B. MM Proposition I (no taxes).
C. MM Proposition II (no taxes).
D. the law of one price.
E. the efficient markets hypothesis.

Blooms: Remember
Difficulty: 1 Basic
Section: 16.3
Topic: M and M Proposition I without taxes

3. The proposition that the cost of equity is a positive linear function of capital structure is called:

A. the capital asset pricing model.

B. MM Proposition I (no taxes).
C. MM Proposition II (no taxes).
D. the law of one price.
E. the efficient markets hypothesis.

Blooms: Remember
Difficulty: 2 Intermediate
Section: 16.4
Topic: M and M Proposition II without taxes

4. The tax savings of the firm derived from the deductibility of interest expense is called the:

A. interest tax shield.

B. depreciable basis.
C. financing umbrella.
D. current yield.
E. tax-loss carry forward savings.

Blooms: Remember
Difficulty: 1 Basic
Section: 16.5
Topic: M and M Proposition I with taxes

5. The unlevered cost of capital is:

A. the cost of capital for a firm with no equity in its capital structure.
B. the cost of capital for a firm with no debt in its capital structure.
C. the interest tax shield times pretax net income.
D. the cost of preferred stock for an all-equity firm.
E. equal to the profit margin for a firm with some debt in its capital structure.

Blooms: Remember
Difficulty: 1 Basic
Section: 16.4

6. The firm's capital structure refers to the:

A. mix of current and fixed assets a firm holds.

B. amount of capital invested in the firm.
C. amount of dividends a firm pays.
D. mix of debt and equity used to finance the firm's assets.
E. amount of cash versus receivables the firm holds.

Blooms: Remember
Difficulty: 1 Basic
Section: 16.1
Topic: Capital structure

7. A general rule for managers to follow is to set the firm's capital structure such that the firm’s:

A. size is maximized.
B. value is maximized.
C. bondholders are secured.
D. suppliers of raw materials are satisfied.
E. dividend payout is maximized.

Blooms: Understand
Difficulty: 1 Basic
Section: 16.2
Topic: Capital structure and firm valuation

8. A levered firm is a company that has:

A. accounts payable as its only liability.

B. some debt in its capital structure.
C. an all-equity capital structure.
D. a tax loss carry forward.
E. taxable income.

Blooms: Understand
Difficulty: 1 Basic
Section: 16.3

9. A manager should attempt to maximize the value of the firm by changing the capital structure if and
only if the value of the firm increases:

A. as a result of the change.

B. to the sole benefit of the managers.
C. to the sole benefit of the debtholders.
D. while also decreasing shareholder value.
E. while holding stockholder value constant.

Blooms: Understand
Difficulty: 1 Basic
Section: 16.2

10.
The effects of financial leverage depend on the operating earnings of the company. Based on this
relationship, assume you graph the EPS and EBI for a firm, while ignoring taxes. Which one of these
statements correctly states a relationship illustrated by the graph?

A. Financial leverage decreases the slope of the EPS line.

B. Below the break-even point unlevered structures have a lower EPS for every dollar of EBI than
levered structures do.
C. Above the break-even point the increase in EPS for unlevered structures is greater than that of
levered structures for every dollar increase in EBI.
D.
Leverage only provides value above the break-even point.
E.
Above the break-even point, the unlevered structure is preferred.

Blooms: Understand
Section: 16.3
Topic: Financial and operating leverage

11. MM Proposition I without taxes proposes that:

A. the value of an unlevered firm exceeds that of a levered firm.

B. there is one ideal capital structure for each firm.
C. leverage does not affect the value of the firm.
D. shareholder wealth is directly affected by the capital structure selected.
E. the value of a levered firm exceeds that of an unlevered firm.

Blooms: Understand
Section: 16.3

12. A key underlying assumption of MM Proposition I without taxes is that:

A. financial leverage increases risk.

B. individuals can borrow at lower rates than corporations.
C. individuals and corporations borrow at the same rate.
D. managers always act to maximize the value of the firm.
E. corporations are all-equity financed.

Blooms: Understand
Section: 16.3

13. In an EPS-EBI graphical relationship, the slope of the debt ray is steeper than the equity ray. The debt
ray has a lower intercept because:

A. more shares are outstanding for the same level of EBI.

B. the break-even point is higher with debt.
C. a fixed interest charge must be paid even at low earnings.
D. the amount of interest per share has only a positive effect on the intercept.
E. the break-even point is lower with debt.

Blooms: Understand
Section: 16.3

14. 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 less income to be distributed over fewer shares.
C. stay fixed, leaving more 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.

Blooms: Understand
Section: 16.3

15. The increase in risk to shareholders when financial leverage is introduced is best evidenced by:

A. higher EPS as EBIT increases.

B. a higher variability of EPS with debt than with all-equity financing.
C. increased use of homemade leverage.
D. the increase in taxes.
E. decreasing earnings as EBIT increases.

Blooms: Understand
Section: 16.3

16. The reason that MM Proposition I does not hold in the presence of corporate taxation is because:

A. levered firms pay less taxes compared with identical unlevered firms.
B. bondholders require higher rates of return than stockholders do.
C. earnings per share are no longer relevant with taxes.
D. dividends become a tax shield.
E. debt is more expensive than equity.

Blooms: Understand
Section: 16.5

17. MM Proposition I with taxes states that:

A. capital structure does not affect firm value.

B. increasing the debt-equity ratio increases firm value.
C. firm value is maximized when the firm is all-equity financed.
D. the cost of equity rises as the debt-equity ratio increases.
E. the unlevered cost of equity is equal to RWacc.

Blooms: Understand
Section: 16.5

18. A firm should select the capital structure which:

A. produces the highest cost of capital.

B. maximizes the value of the firm.
C. minimizes taxes.
D. is fully unlevered.
E. has no debt.

Blooms: Understand
Section: 16.2

19. Bryan invested in Bryco stock when the firm was financed solely with equity. The firm now has a debt-
equity ratio of .3. To maintain the same level of leverage he originally had, Bryan needs to:

A. borrow some money and purchase additional shares of Bryco stock.

B. maintain his current position in Bryco stock.
C. sell some shares of Bryco stock and hold the proceeds in cash.
D. sell some shares of Bryco stock and loan out the proceeds.
E. sell half of his Bryco stock and invest the proceeds in risk-free securities.

Blooms: Understand
Section: 16.3
Topic: Homemade leverage

20. In the absence of taxes, the capital structure chosen by a firm doesn't really matter because of:

A. taxes.
B. the interest tax shield.
C. the relationship between dividends and earnings per share.
D. the effects of leverage on the cost of equity.
E. homemade leverage.

Blooms: Understand
Section: 16.3

21. MM Proposition I with no tax supports the argument that:

A. business risk determines the return on assets.

B. the cost of equity rises as leverage rises.
C. it is completely irrelevant how a firm arranges its finances.
D. a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the
increased probability of financial distress.
E. financial risk is determined by the debt-equity ratio.

Blooms: Understand
Section: 16.3

22. The proposition that the value of a levered firm is equal to the value of an unlevered firm is known as:

A. MM Proposition I with no tax.

B. MM Proposition II with no tax.
C. MM Proposition I with tax.
D. MM Proposition II with tax.
E. both MM I with and without tax..

Blooms: Understand
Section: 16.3

23. The concept of homemade leverage is most associated with:

A. MM Proposition I with no tax.

B. MM Proposition II with no tax.
C. MM Proposition I with tax.
D. MM Proposition II with tax.
E. no MM Proposition.

Blooms: Understand
Section: 16.3

24.
According to MM Proposition II with no taxes, the:

A. return on assets is determined by financial risk.

B.
required return on equity is a linear function of the firm’s debt-equity ratio.
C. cost of equity in inversely related to the firm’s debt-equity ratio.

D. cost of debt must equal the cost of equity.
E.
required return on assets exceeds the weighted average cost of capital.

Blooms: Understand
Section: 16.4

25. MM Proposition I with taxes supports the theory that:

A. there is a positive linear relationship between the amount of debt in a levered firm and its value.
B. the value of a firm is inversely related to the amount of leverage used by the firm.
C. the value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax
shield.
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 rises.

Blooms: Understand
Section: 16.5

26. MM Proposition I with taxes is based on the concept that:

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

Blooms: Understand
Section: 16.5

27. MM Proposition II with taxes:

A. has the same general implications as MM Proposition II without taxes.

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. supports the argument that the cost of equity decreases as the debt-equity ratio increases.
E. reaches the final conclusion that the capital structure decision is irrelevant to the value of a firm.

Blooms: Understand
Section: 16.5
Topic: M and M Proposition II with taxes

28. 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. the cost of levered equity depends solely on the return on debt, the debt-equity ratio, and the tax rate.
C. a firm's cost of equity capital is a positive linear function of the firm's capital structure.
D. the cost of equity is equivalent to the required return on the total assets of a levered firm.
E. supports the argument that the size of the pie does not depend on how the pie is sliced.

Blooms: Understand
Section: 16.5
Topic: M and M Proposition II with taxes

29. The interest tax shield has no value for a firm when:

A. the firm’s debt-equity ratio is exactly equal to 1.

B. the firm’s debt-equity ratio is exactly .5.
C. the firm is unlevered.
D. shareholders fully utilize homemade leverage.
E. RWACC equals R0.

Blooms: Understand
Section: 16.5

30. The interest tax shield is a key reason why:

A. the required rate of return on assets rises when debt is added to the capital structure.
B. the value of an unlevered firm is equal to the value of a levered firm.
C. the net cost of debt to a firm is generally less than the cost of equity.
D. the cost of debt is equal to the cost of equity for a levered firm.
E. firms prefer equity financing over debt financing.

Blooms: Understand
Section: 16.5

31. Which one of the following will tend to increase the benefit of the interest tax shield given a progressive
tax rate structure?

A. a reduction in tax rates

B. a large tax loss carryforward
C. a large depreciation tax deduction
D. a sizeable increase in taxable income
E. a catastrophic loss

Blooms: Understand
Section: 16.5

32. Thompson amp; Thomson is an all-equity firm that has 280,000 shares of stock outstanding. The
company is in the process of borrowing $2.4 million at 5.5 percent interest to repurchase 75,000 shares
of the outstanding stock. What is the value of this firm if you ignore taxes?

A. $8,960,000
B. $9,240,000
C. $10,710,000
D. $12,500,000
E. $11,360,000

Blooms: Analyze
Section: 16.3

33. Uptown Interior Designs is an all-equity firm that has 40,000 shares of stock outstanding. The company
has decided to borrow $74,000 to buy out the 2,100 shares of a deceased stockholder. What is the total
value of this firm if you ignore taxes?

A. $2,008,157
B. $1,388,056
C. $1,409,524
D. $3,885,000
E. $2,630,620

Blooms: Analyze
Section: 16.3

34. You own 25 percent of Unique Vacations, Inc. You have decided to retire and want to sell your shares
in this closely held, all-equity firm. The other shareholders have agreed to have the firm borrow $1.5
million to purchase your 1,000 shares of stock. What is the total value of this firm today if you ignore
taxes?

A. $4.8 million
B. $5.1 million
C. $5.4 million
D. $5.7 million
E. $6.0 million

Blooms: Analyze
Section: 16.3

35. A firm has a debt-equity ratio of .64, a pretax cost of debt of 8.5 percent, and a required return on assets
of 12.6 percent. What is the cost of equity if you ignore taxes?

A. 8.06%
B. 8.55%
C. 11.12%
D. 15.22%
E. 16.38%

Blooms: Analyze
Section: 16.4

36. Bigelow has a levered cost of equity of 14.29 percent and a pretax cost of debt of 7.23 percent. The
required return on the assets is 11 percent. What is the firm's debt-equity ratio based on MM Proposition
II with no taxes?

A. .67
B. .87
C. .72
D. .75
E. .81

Blooms: Analyze
Section: 16.4

37. The Backwoods Lumber Co. has a debt-equity ratio of .68. The firm's required return on assets is 11.7
percent and its levered cost of equity is 15.54 percent. What is the pretax cost of debt based on MM
Proposition II with no taxes?

A. 6.76%
B. 6.39%
C. 7.25%
D. 6.05%
E. 7.50%

Blooms: Analyze
Section: 16.4

38. The Winter Wear Company has expected earnings before interest and taxes of $3,800, an unlevered cost
of capital of 15.4 percent and a tax rate of 35 percent. The company also has $2,600 of debt with a
coupon rate of 5.7 percent. The debt is selling at par value. What is the value of this firm?

A. $15,585.32
B. $16,948.96
C.
$12,115.32
D.
$12,055.04
E.
$17,700.08

Blooms: Analyze
Section: 16.5

39. The Dance Studio is currently an all-equity firm that has 22,000 shares of stock outstanding with a
market price of $27 a share. The current cost of equity is 12 percent and the tax rate is 35 percent. The
firm is considering adding $225,000 of debt with a coupon rate of 6.25 percent to its capital structure.
The debt will sell at par. What will be the levered value of the equity?

A. $325,500
B. $447,750
C. $721,250
D. $672,750
E. $594,000

Blooms: Analyze
Section: 16.5

40. The Montana Hills Co. has expected earnings before interest and taxes of $17,100, an unlevered cost of
capital of 12.4 percent, and debt with both a book and face value of $25,000. The debt has an annual 6.2
percent coupon. If the tax rate is 34 percent, what is the value of the firm?

A. $91,016.13
B. $137,903.23
C. $99,516.13
D. $106,666.67
E. $146,403.23

Chapter 16

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Chapter 16

Hochgeladen von

Copyright:

Verfügbare Formate

Chapter 16

A. the capital asset pricing model.

A. the capital asset pricing model.

A. interest tax shield.

A. mix of current and fixed assets a firm holds.

A. accounts payable as its only liability.

A. as a result of the change.

A. Financial leverage decreases the slope of the EPS line.

A. the value of an unlevered firm exceeds that of a levered firm.

A. financial leverage increases risk.

A. more shares are outstanding for the same level of EBI.

A. vary with EBIT levels.

A. higher EPS as EBIT increases.

A. capital structure does not affect firm value.

A. produces the highest cost of capital.

A. borrow some money and purchase additional shares of Bryco stock.

A. business risk determines the return on assets.

A. MM Proposition I with no tax.

A. MM Proposition I with no tax.

A. return on assets is determined by financial risk.

C. cost of equity in inversely related to the firm’s debt-equity ratio.

A. has the same general implications as MM Proposition II without taxes.

A. the firm’s debt-equity ratio is exactly equal to 1.

A. a reduction in tax rates

Das könnte Ihnen auch gefallen