Question 1

Which of the following statements concerning capital structure theory is NOT CORRECT?

Accepted Answer

A)   Under MM with zero taxes,financial leverage has no effect on a firm's value.
B)   Under MM with corporate taxes,the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt.
C)   Under MM with corporate taxes,rs increases with leverage,and this increase exactly offsets the tax benefits of debt financing.
D)   Under MM with corporate taxes,the effect of business risk is automatically incorporated because rsL is a function of rsU.
E)   The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt.F) B) and E)
G) None of the above

Question 2

Blueline Publishers is considering a recapitalization plan.It is currently 100% equity financed but under the plan it would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock.The recapitalization would not change the company's total assets,nor would it affect the firm's basic earning power,which is currently 15%.The CFO believes that this recapitalization would reduce the WACC and increase stock price.Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan?

Accepted Answer

A)   The company's earnings per share would decline.
B)   The company's cost of equity would increase.
C)   The company's ROA would increase.
D)   The company's ROE would decline.
E)   The company's net income would increase.F) C) and E)
G) C) and D)

Question 3

Which of these items will not generally be affected by an increase in the debt ratio?

Accepted Answer

A)   Total risk.
B)   Financial risk.
C)   Market risk.
D)   The firm's beta.
E)   Business risk.F) A) and D)
G) B) and D)

Question 4

An all-equity firm with 200,000 shares outstanding,Antwerther Inc. ,has $2,000,000 of EBIT,which is expected to remain constant in the future.The company pays out all of its earnings,so earnings per share (EPS) equal dividends per shares (DPS) .Its tax rate is 40%.
The company is considering issuing $5,000,000 of 10.0% bonds and using the proceeds to repurchase stock.The risk-free rate is 6.5%,the market risk premium is 5.0%,and the beta is currently 0.90,but the CFO believes beta would rise to 1.10 if the recapitalization occurs.
Assuming that the shares can be repurchased at the price that existed prior to the recapitalization,what would the price be following the recapitalization?

Accepted Answer

A)   $65.77
B)   $69.23
C)   $72.69
D)   $76.33
E)   $80.14F) A) and D)
G) All of the above

Exam 15: Capital Structure Decisions

Which of the following statements concerning capital structure theory is NOT CORRECT?

Correct Answer
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Correct Answer
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Correct Answer
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Which of these items will not generally be affected by an increase in the debt ratio?

Correct Answer
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Exam 15: Capital Structure Decisions

Which of the following statements concerning capital structure theory is NOT CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of these items will not generally be affected by an increase in the debt ratio?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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