capital structure

Question 21
21. A firm’s optimal capital structure:
d. is the debt-equity ratio that results in the lowest possible weighted average cost of capital.
a. is generally a mix of 40 percent debt and 60 percent equity.
e. is found by locating the mix of debt and equity which causes the earnings per share to equal exactly $1.
b. exists when the debt-equity ratio is .50.
c. is the debt-equity ratio that exists at the point where the firm’s weighted after tax cost of debt is minimized.

Question 22
22. Which one of the following statements concerning financial leverage is correct?
c. If a firm employs financial leverage, the shareholders will be exposed to greater risk.
b. A firm employing leverage will always have a higher earnings per share than a firm which does not employ leverage.
e. Financial leverage is always beneficial to a firm when the interest rate on the debt is less than 10 percent.
a. The benefits of leverage are unaffected by changes in a firm’s earnings before interest and taxes.
d. The earnings per share remain constant even when an all-equity firm switches to a debt-equity ratio of .4.

Don't use plagiarized sources. Get Your Custom Essay on
capital structure
From $10/Page
Order Essay

Question 23
23. Less Debt, Inc., just revised its capital structure such that the firm’s debt-equity ratio decreased from .80 to .40. Those individual investors who prefer the old capital structure:
e. can replicate that structure by reducing their debt and doubling their investment in the firm.
a. should sell half of their equity holdings and invest in cash.
c. should loan out funds equivalent to the amount invested in Less Debt.
b. should sell half of their equity holdings and loan out the net proceeds of the sale.
d. can replicate that structure by increasing their use of homemade leverage.

Question 24
24. M&M Proposition I, without taxes, states that:
c. firms should borrow 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.
b. the weighted average cost of capital is constant.
a. the cost of equity rises when financial leverage rises.
d. it is completely irrelevant how a firm arranges its finances.

Question 25
25. According to M&M Proposition II, without taxes, the cost of equity depends on the firm’s: (I. earnings before interest and taxes; II. cost of debt; III. debt-equity ratio; IV. required rate of return on its assets)
d. I, III, and IV only
a. I and II only
c. I, II, and IV only
b. II, III, and IV only
e. I, II, III, and IV

Question 26
26. Financial risk:
c. increases as the left-hand side of a firm’s balance sheet changes.
d. increases as a firm’s debt-equity ratio increases.
b. increases as the risk of a firm’s new projects increases.
a. determines the required return on a firm’s assets.
e. represents the entire increase in a firm’s systematic risk.

Question 27
27. Which of the following statements correctly relate to M&M Proposition I, with taxes? (I. Debt financing is advantageous to a firm; II. The value of a firm unlevered is greater than the value levered; III. The weighted average cost of capital (WACC) is constant; IV. The financial structure of a firm is completely irrelevant)
b. III only
a. I only
e. I, III, and IV only
d. I and II only
c. III and IV only

Question 28
28. The maximum firm value, according to the static theory of capital structure, occurs at a point where the:
a. value of a levered firm initially begins to exceed that of an unlevered firm.
e. value of the firm equalizes the costs of financial distress with the present value of the tax shield on debt.
c. value of the firm is equal to the value defined by M&M Proposition I, with tax.
b. financial distress costs are equal to zero.
d. value of the firm, as defined by M&M Proposition I, with tax, is exactly equal to the value of the firm, as defined by M&M Proposition I, without tax.

Question 29
29. Which of the following are correct assumptions based on the static theory of capital structure? (I. There is a direct relationship between the amount of benefit a firm realizes from leverage and the amount of the annual depreciation expense; II. There is an inverse relationship between the amount that a firm should borrow and the volatility of its earnings before interest and taxes (EBIT); III. The costs of financial distress are unrelated to a firm’s assets; IV. The higher a firm’s tax rate, the greater the firm’s incentive to borrow)
a. I and II only
d. II and IV only
c. II and III only
b. I and III only
e. I and II only

Question 30
30. Which one of the following statements is true concerning a bankruptcy?
a. A Chapter 7 bankruptcy is a reorganization.
b. A federal judge has the authority to deny a Chapter 11 bankruptcy petition filed by a firm.
e. New equity securities must be issued if a firm undergoes a Chapter 11 bankruptcy.
c. The absolute priority rule must be followed in both Chapter 7 and Chapter 11 bankruptcies.
d. Only a firm can file a bankruptcy petition.

Question 31
31. Donaldsen International is an all-equity firm with a total market value of $120,000. The firm has 10,000 shares of stock outstanding. Management is considering issuing $50,000 of debt at an interest rate of 6.5 percent and using the proceeds on a stock repurchase. It is expected that the company will have earnings before interest and taxes (EBIT) of $22,000 if the economy is normal, $12,000 if it is in recession, and $30,000 if the economy booms. Ignore taxes. The earnings per share (EPS) will decrease by ____ if the economy goes into a recession rather than being normal as it is currently. Assume that the firm maintains its all-equity status.
e. 54.5 percent
a. 39.4 percent
d. 45.5 percent
b. 41.6 percent
c. 42.0 percent

Question 32
32. Blue & Co. is an all-equity firm with a total market value of $230,000. The firm has 25,000 shares of stock outstanding. Management is considering issuing $100,000 of debt at an interest rate of 7 percent and using the proceeds to repurchase shares. Management estimates that the economy will be fairly normal and thus the firm’s earnings before interest and taxes (EBIT) will be $60,000. Ignore taxes. What is the anticipated earnings per share (EPS) if the debt is issued?
b. $3.46
a. $3.20
c. $3.54
e. $3.82
d. $3.75

Question 33
33. Master Cylinders has 15,000 shares of stock outstanding and no debt as the original founder of the firm did not approve of debt financing. The new CEO is considering issuing $250,000 of debt and using the proceeds to retire 5,000 shares of stock. The interest rate on debt is 7.5 percent. What is the break-even level of earnings before interest and taxes (EBIT) between these two capital structure options?
e. $59,250
a. $38,500
c. $56,250
b. $47,750
d. $58,500

Question 34
34. Deltona, USA is a development company that currently is financed with 100 percent equity. There are 15,000 shares outstanding at a market price of $50 a share. The dividend payout ratio is 100 percent. Deltona has earnings before interest and taxes (EBIT) of $60,000. Ignore taxes. The firm has decided to issue $250,000 of debt at a rate of 7 percent and use the proceeds to repurchase shares. Scott owns 100 shares of Deltona and decided to continue holding them. Once Deltona issued the debt, Scott’s total annual dividend income:
d. increased from $400 to $425.
c. decreased from $300 to $200.
e. remained constant.
b. increased from $100 to $200.
a. decreased from $400 to $200.

Question 35
35. Day ‘n Nite currently has 25,000 shares of stock outstanding and no debt. The price per share is $20. The firm is considering borrowing funds at 8 percent interest and using the proceeds to repurchase 5,000 shares of stock. Ignore taxes. How much is the firm borrowing?
b. $140,000
e. $185,000
a. $100,000
c. $165,000
d. $180,000

Question 36
36. Jennifer’s Boutique has a pre-tax cost of debt of 9 percent and a return on assets of 14 percent. The debt-equity ratio is .75. Ignore taxes. What is the cost of equity?
a. 7.25 percent
d. 17.75 percent
b. 12.00 percent
e. 18.25 percent
c. 16.67 percent

Question 37
37. The Smith Co. has a $10 million bond issue outstanding with a coupon rate of 6 percent. The tax rate is 35 percent. What is the present value of the tax shield?
e. $3.65 million
a. $3.50 million
d. $3.62 million
b. $3.53 million
c. $3.57 million

Question 38
38. Trade International is an all-equity firm that has projected earnings before interest and taxes of $497,000 forever. The current cost of equity is 16 percent and the tax rate is 34 percent. The company is in the process of issuing $1.5 million of bonds at par that carry a 6 percent annual coupon. What is the levered value of the firm?
a. $2,112,003
d. $2,448,009
b. $2,113,609
c. $2,424,024
e. $2,560,125

Question 39
39. Uncle Pete’s is an all-equity firm with a current cost of equity of 18 percent. The estimated earnings before interest and taxes is $204,000 annually forever. Currently, the firm has no debt but is in the process of borrowing $500,000 at 9 percent interest. The tax rate is 34 percent. What is the value of the unlevered firm?
d. $723,150
c. $654,900
e. $748,000
a. $609,900
b. $630,850

Question 40
40. A firm has a weighted average cost of capital of 8.59 percent, and a cost of equity of 11 percent. The debt-equity ratio is .65. There are no taxes. What is the firm’s cost of debt?
e. 5.90 percent
b. 5.01 percent
c. 5.23 percent
a. 4.88 percent
d. 5.68 percent

Solution Preview
Please see attached file where answers have been provided:

Question 21 1 points Save
21. A firm’s optimal capital structure:
d. is the debt-equity ratio that results in the lowest possible weighted average cost of capital.
a. is generally a mix of 40 percent debt and 60 percent equity.
e. is found by locating the mix of debt and equity which causes the earnings per share to equal exactly $1.
b. exists when the debt-equity ratio is .50.
c. is the debt-equity ratio that exists at the point where the firm’s weighted aftertax cost of debt is minimized.

Answer: d. is the debt-equity ratio that results in the lowest possible weighted average cost of capital.

The optimal, or target capital structure is the structure with the lowest possible WACC

Question 22 1 points Save
22. Which one of the following statements concerning financial leverage is correct?
c. If a firm employs financial leverage, the shareholders will be exposed to greater risk.
b. A firm employing leverage will always have a higher earnings per share than a firm which does not employ leverage.
e. Financial leverage is always beneficial to a firm when the interest rate on the debt is less than 10 percent.
a. The benefits of leverage are unaffected by changes in a firm’s earnings before interest and taxes.
d. The earnings per share remain constant even when an all-equity firm switches to a debt-equity ratio of .4.

Answer: c. If a firm employs financial leverage, the shareholders will be exposed to greater risk.

Question 23 1 points Save
23. Less Debt, Inc., just revised its capital structure such that the firm’s debt-equity ratio decreased from .80 to .40. Those individual investors who prefer the old capital structure:
e. can replicate that structure by reducing their debt and doubling their investment in the firm.
a. should sell half of their equity holdings and invest in cash.
c. should loan out funds equivalent to the amount invested in Less Debt.
b. should sell half of their equity holdings and loan out the net proceeds of the sale.
d. can replicate that structure by increasing their use of homemade leverage.

Answer: d. can replicate that structure by increasing their use of homemade leverage.

Question 24 1 points Save
24. M&M Proposition I, without taxes, states that:
c. firms should borrow 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.
b. the weighted average cost of capital is constant.
a. the cost of equity rises when financial leverage rises.
d. it is completely irrelevant how a firm arranges its finances.

Answer: d. it is completely irrelevant how a firm arranges its finances.

Question 25 1 points Save
25. According to M&M Proposition II, without taxes, the cost of equity depends on the firm’s: (I. earnings before interest and taxes; II. cost of debt; III. debt-equity ratio; IV. required rate of return on its assets)
d. I, III, and IV only
a. I and II only
c. I, II, and IV only
b. II, III, and IV only
e. I, II, III, and IV

Answer: b. II, III, and IV only

Question 26 1 points Save
26. Financial risk:
c. increases as the left-hand side of a firm’s balance sheet changes.
d. increases as a firm’s debt-equity ratio increases.
b. increases as the risk of a firm’s new projects …

Solution Summary
Answers multiple choice questions on capital structure dealing with optimal capital structure, financial leverage, debt-equity ratio, financial risk, bankruptcy, M&M Proposition I, M&M Proposition II, static theory of capital structure, EPS, break-even level of earnings before interest and taxes, dividend income, cost of equity, tax shield, levered value of the firm, value of the unlevered firm, cost of debt..To continue with the answer click on mycoursewriter.com/

MyCourseWriter
Order NOW For A 35% Discount!
Pages (550 words)
Approximate price: -

Why Choose Us

Quality Homework Writing

Do you need to ace your test? We have qualified writers to assist you in writing 100% quality homework writing. Mycoursewriter offers students unique and personalized custom papers that help them in getting good grades. Our academic experts will assist you with your dissertation papers, thesis writing, research papers, term papers, and case study homework help. Our writers are experienced and have perfected the art of crafting the best essay writing papers regardless of your academic level. Order now and get our superb homework writing services.

Expert Academic Writers

A student needs professional assistance outside class time. Before hiring our writers, they undergo thorough tests and strict educational backgrounds. After passing a test, our writers undergo training to ensure they deliver expert professional papers to our customers. We ensure they meet the timely delivery of papers and follow our customers' provided instructions. Every writer is an ENL writer and is from the USA, Canada, UK, or Australia. Our experts approach papers effectively depending on their area of specialization.

Affordable Price Guarantees

Is the deal too good to be true? Mycoursewriter is the most affordable assignment help website on the market. We consider students' daily needs for academic help. Our paper costs are reasonably priced to approximately 90% of students around the globe. Our main aim is to ensure students achieve academic excellence, and we believe inconsiderable prices should not hinder students from getting quality homework writing help. In case of any dissatisfaction, we offer unlimited revisions and rewrites without extra charges.

Timely delivery of papers

Tight deadline? Is your paper due in the next few hours? Worry no more. Our writers are here for your rescue. Many college students find it hard to balance their social and academic life and get caught up with academic deadlines. Drafting your paper at the last minute does not allow you to conduct extensive research and craft the correct answers. We have expert writers ready to work on your assignment writing. Urgent writing services are the ultimate solutions you need. We guarantee you timely delivery of papers at your convenience and specified time delivery of the customer.

100% Original Tasks

The ultimate deal-breaker in achieving good grades is submitting imitative papers. Plagiarism is a breach of examination standards and has serious consequences. Students need to deliver papers written in their understanding by paraphrasing their research findings and relevant citations. Our expert's primary consideration is providing free plagiarized papers that meet the lecturers' requirements. Our editors will proofread your paper before delivery ad ensure your papers will not be substandard. We guarantee extreme originality, and in case of any customer concerns, we offer a plagiarism report.

All Round the clock Customer Support

Our website is user-friendly and super useful! Mycoursewriter is the most trusted online writing website always available to provide you with assignment writing services that you need. Our primary concern is meeting customer need specifications by our friendly customer support team that Is available all the time. Our website usability is self-learnable but in case of any problem, feel free to contact us directly through our website email: support@mycourserwiter.com. We have diligently satisfied thousands of students, and you can witness this on our sites' review page.

Try it now!

Calculate the price of your order

We'll send you the first draft for approval by at
Total price:
$0.00

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Advantages of Using Our Assignment writing Services

Mycoursewriter welcomes you for superb essay writing services. We are a legit site offering help with your most challenging homework writing assignments at affordable prices. Your essay paper will be assigned to a professional writer who will craft the paper from scratch according to your provided instructions.

Essays

Essay Writing and Proofreading Services

Essay writing is a common assignment writing for most college students. It takes a lot of time to craft a complete perfect essay. Mycourserwiter offers the best essay writing and proofreading services for most college students. Your paper is assigned to an expert writer who does thorough research on fresh ideas and personalizes your essay paper according to your assignment writing guidelines. Our essays are entirely exceptional and undergo a strict procedure that includes papers free from plagiarism and thorough proofreading.

Admissions

Admission and Business Papers

Writing an admission paper is not every student's desire, and this should not hinder any student from earning an admission. Writing a perfect personal statement to earn a position in a dream school or job can be stressful. Personal statements should display a high level of confidence and uniqueness. Admission essays require you to have a vast knowledge of the current happenings in the world and knowhow of the business world. We have qualified writers with skills who will write your admission paper through comprehensive research. All you have to do is provide us with little details about yourself, instructions and our writers will craft a perfect paper for you.

Editing

Editing and Proofreading

Mycoursewriter offers you assignment writing services free from grammatical and formatting mistakes. An error-free paper is significant in scoring the desired maximum grades. We have a team of editors who will go through your paper after our expert writers have delivered their fully crafted papers. Our writers will cover all the aspects of your paper instructions, such as fonts, spacing, and educational formats. Our team of editors will check through your paper to make sure it meets the formatting style provided in the paper instructions. Under no circumstances will a poorly formatted paper will be forwarded to you as our team of editors will ensure careful proofreading.

Coursework

Technical Papers

Assignment writing is part of a learning process, and one may not have the knowledge to answer all questions correctly. This should not be a stress to you as we have qualified essay writing experts to help you. Our qualified writers are holders of PhDs, Degrees, and Masters in different areas of study and can handle any papers regardless of the complexity. Multiple assignments may be challenging to finish on time. Our skilled professional writers are here to assist you in crafting all the correct answers for your assignment. Stop stressing about your homework writing and place an order with us, and our expert writers will provide you with the best assignment help.