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saint mba570 module 7 quiz




Question;Question 1.1.Equity in a firm with debt is called: (Points: 10) levered equity.riskless equity.unlevered equity.preferred equity.Question 2.2.Which of the following is not one of Modigliani and Miller's sets of conditions referred to as perfect capital markets? (Points: 10) All investors hold the efficient portfolio of assets.There are no taxes, transaction costs, or issuance costs associated with security trading.A firm's financing decisions do not change the cash flows generated by its investments, nor do they reveal new information about them.Investors and firms can trade the same set of securities at competitive market prices equal to the present value of their future cash flows.Question 3.3.Consider the following equation:E+D=U=A. TheUin this equation represents: (Points: 10) the value of the firm's equity.the market value of the firm's assets.the value of the firm's unlevered equity.the value of the firm's debt.Question 4.4.Assume that Rose Corporation's (RC) has 5 million shares outstanding and its stock is trading for a price of $12.00 per share. RC is considering borrowing $12 million at a rate of 6% and using the proceeds to repurchase shares at the current price of $12.00. Following the borrowing of $12 and subsequent share repurchase, the number of shares that RC will have outstanding is closest to __________. (Points: 10) 4.0 million6.0 million4.9 million4.5 millionQuestion 5.5.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 __________. (Points: 10) $450 million$179 million$290 million$95 millionQuestion 6.6.Which of the following statements is false? (Points: 10) Given a 35% corporate tax rate, for every $1 in new permanent debt that the firm issues, the value of the firm increases by $0.65.The firm?s marginal tax rate may fluctuate due to changes in the tax code and changes in the firm?s income bracket.Many large firms have a policy of maintaining a certain amount of debt on their balance sheets.Typically, the level of future interest payments varies due to changes the firm makes in the amount of debt outstanding, changes in the interest rate on that debt, and the risk that the firm may default and fail to make an interest payment.Question 7.7.Which of the following statements is false? (Points: 10) Once investors know the recap will occur, the share price will rise immediately to a level that reflects the value of the interest tax shield that the firm will receive from its recapitalization.When securities are fairly priced, the original shareholders of a firm capture the full benefit of the interest tax shield from an increase in leverage.In the presence of corporate taxes, we do not include the interest tax shield as one of the firm's assets on its market value balance sheet.We can analyze the recapitalization using the market value balance sheet, it states that the total market value of a firm's securities must equal the total market value of the firm's assets.Question 8.8.KD Industries has 30 million shares outstanding with a market price of $20 per share and no debt. KD has had consistently stable earnings, and pays a 35% tax rate. Management plans to borrow $200 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. The value of KD's unlevered equity is closest to __________. (Points: 10) $600 million$470 million$390 million$400 millionQuestion 9.9.Which of the following statements is false? (Points: 10) To determine the true tax benefit of leverage, we need to evaluate the combined effect of both corporate and personal taxes.A personal tax disadvantage for debt causes the WACC to decline more slowly with leverage than it otherwise would.Personal taxes have an indirect effect on the firm's weighted average cost of capital.In the United States and many other countries, capital gains from equity have historically been taxed more heavily than interest income.Question 10.10.Which of the following statements is false? (Points: 10) A biotech firm might be developing drugs with tremendous potential, but it has yet to receive any revenue from these drugs. Such a firm will not have taxable earnings. In that case, a tax-optimal capital structure does not include debt.No corporate tax benefit arises from incurring interest payments that regularly exceed EBIT.The optimal level of leverage from a tax saving perspective is the level such that interest equals EBIT.In general, as a firm's interest expense approaches its expected taxable earnings, the marginal tax advantage of debt increases, limiting the amount of equity the firm should use.


Paper#44765 | Written in 18-Jul-2015

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