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Question;71. Down Bedding has an unlevered cost of capital of;13 percent, a cost of debt of 7.8 percent, and a tax rate of 32 percent. What;is the target debt-equity ratio if the targeted cost of equity is 15.51;percent?;A..63;B..68;C..71;D..76;E..84;72. Johnson Tire Distributors has debt with both a;face and a market value of $12,000. This debt has a coupon rate of 6 percent;and pays interest annually. The expected earnings before interest and taxes are;$2,100, the tax rate is 30 percent, and the unlevered cost of capital is 11.7;percent. What is the firm's cost of equity?;A. 22.46 percent;B. 22.87 percent;C. 23.20 percent;D. 23.59 percent;E. 25.14 percent;73. Country Markets has an unlevered cost of capital;of 12 percent, a tax rate of 38 percent, and expected earnings before interest;and taxes of $15,700. The company has $11,000 in bonds outstanding that have a;6 percent coupon and pay interest annually. The bonds are selling at par value.;What is the cost of equity?;A. 12.55 percent;B. 13.36 percent;C. 13.64 percent;D. 14.07 percent;E. 14.29 percent;74. The Pizza Palace has a cost of equity of 15.3;percent and an unlevered cost of capital of 11.8 percent. The company has;$22,000 in debt that is selling at par value. The levered value of the firm is;$41,000 and the tax rate is 34 percent. What is the pre-tax cost of debt?;A. 4.73 percent;B. 6.18 percent;C. 6.59 percent;D. 7.22 percent;E. 9.92 percent;75. The Green Paddle has a cost of equity of 13.73;percent and a pre-tax cost of debt of 7.6 percent. The debt-equity ratio is;0.65 and the tax rate is 32 percent. What is Green Paddle's unlevered cost of;capital?;A. 11.85 percent;B. 12.78 percent;C. 14.29 percent;D. 14.46 percent;E. 15.08 percent;76. Bob's Warehouse has a pre-tax cost of debt of 8.4;percent and an unlevered cost of capital of 14.6 percent. The firm's tax rate;is 37 percent and the cost of equity is 18 percent. What is the firm's;debt-equity ratio?;A. 0.72;B. 0.76;C. 0.79;D. 0.82;E. 0.87;77. Douglass & Frank has a debt-equity ratio of;0.45. The pre-tax cost of debt is 7.6 percent while the unlevered cost of;capital is 13.3 percent. What is the cost of equity if the tax rate is 39;percent?;A. 13.79 percent;B. 14.86 percent;C. 15.92 percent;D. 18.40 percent;E. 18.87 percent;78. The June Bug has a $270,000 bond issue;outstanding. These bonds have a 7.5 percent coupon, pay interest semiannually;and have a current market price equal to 98.6 percent of face value. The tax;rate is 39 percent. What is the amount of the annual interest tax shield?;A. $3,948.75;B. $4,112.60;C. $5,311.22;D. $7,897.50;E. $8,225.20;79. Georga's Restaurants has 4,500 bonds outstanding;with a face value of $1,000 each and a coupon rate of 8.25 percent. The;interest is paid semi-annually. What is the amount of the annual interest tax;shield if the tax rate is 37 percent?;A. $137,362.50;B. $162,411.90;C. $187,750.00;D. $210,420.00;E. $233,887.50;80. D. L. Tuckers has $21,000 of debt outstanding that;is selling at par and has a coupon rate of 7.5 percent. The tax rate is 32;percent. What is the present value of the tax shield?;A. $504;B. $615;C. $644;D. $6,200;E. $6,720;81. Jemisen's has expected earnings before interest;and taxes of $6,200. Its unlevered cost of capital is 13 percent and its tax;rate is 34 percent. The firm has debt with both a book and a face value of;$2,500. This debt has a 9 percent coupon and pays interest annually. What is;the firm's weighted average cost of capital?;A. 12.48 percent;B. 12.66 percent;C. 13.87 percent;D. 14.14 percent;E. 14.37 percent;82. A firm has debt of $12,000, a leveraged value of;$26,400, a pre-tax cost of debt of 9.20 percent, a cost of equity of 17.6;percent, and a tax rate of 37 percent. What is the firm's weighted average cost;of capital?;A. 11.47 percent;B. 11.52 percent;C. 11.69 percent;D. 12.23 percent;E. 12.48 percent;83. Young's Home Supply has a debt-equity ratio of;0.80. The cost of equity is 14.5 percent and the aftertax cost of debt is 4.9;percent. What will the firm's cost of equity be if the debt-equity ratio is;revised to 0.75?;A. 10.89 percent;B. 11.47 percent;C. 11.70 percent;D. 13.89 percent;E. 14.23 percent;84. Percy's Wholesale Supply has earnings before;interest and taxes of $106,000. Both the book and the market value of debt is;$170,000. The unlevered cost of equity is 15.5 percent while the pre-tax cost;of debt is 8.6 percent. The tax rate is 38 percent. What is the firm's weighted;average cost of capital?;A. 11.94 percent;B. 12.65 percent;C. 13.45 percent;D. 14.01 percent;E. 14.37 percent;Essay;Questions;85. Draw the following two graphs, one above the;other: In the top graph, plot firm value on the vertical axis and total debt on;the horizontal axis. Use this graph to illustrate the value of a firm under;M&M without taxes, M&M with taxes, and the static theory of capital;structure. On the lower graph, plot the WACC on the vertical axis and the;debt-equity ratio on the horizontal axis. Use this second graph to illustrate;the value of the firm's WACC under M&M without taxes, M&M with taxes;and the static theory. Briefly explain what the two graphs reveal about firm;value and its cost of capital under the three different theories.;86. Based on the M&M propositions with and without;taxes, how much time should a financial manager spend analyzing the capital;structure of a firm? What if the analysis is based on the static theory?;87. Pete is the CFO of Dexter International. He would;like to increase the debt-equity ratio of the firm but is concerned that the;firm's shareholders may not be willing to accept additional financial leverage.;Pete has come to you for advice. What is your recommendation?;88. In each of the theories of capital structure, the;cost of equity increases as the amount of debt increases. So why don't;financial managers use as little debt as possible to keep the cost of equity;down? After all, aren't financial managers supposed to maximize the value of a;firm?;89. Explain how a firm loses value during the;bankruptcy process from both a creditors and a shareholders perspective.

 

Paper#51107 | Written in 18-Jul-2015

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