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44. Assume an unlevered firm changes its capital structure to include $1 million in permanent
debt at a 7% interest rate. The tax rate is 35%. According to MM I with taxes, the value of the firm
will increase by ____ due to this change in its capital structure.
45. In a world with corporate taxes but no possibility of financial distress, the value of the
firm is maximized when the:
46. Calculate the WACC for a firm that pays 10% on its debt, requires an 18% rate of return
on its equity, finances 45% of assets with debt, and has a tax rate of 35%.
47. What is the after-tax cost of debt for a firm in the 35% tax bracket that pays 15% on its
debt?
48. A firm has an expected return on equity of 15% and an after-tax cost of debt of 6%. What
debt-equity ratio should be used in order to keep the WACC at 12%?
49. If the present value of the interest tax shield equals the present value of the costs of
financial distress, then the:
50. The present value of the costs of financial distress increases with increases in the debt
ratio because the:
51. When financial disaster is looming, management may borrow to invest in projects having
a negative expected NPV because:
52. Firms facing financial distress may pass up positive NPV projects rather than commit
new equity because:
53. The trade-off theory of capital structure suggests that firms:
54. The trade-off theory of capital structure describes the optimal capital structure for any
firm as being the level of debt that:
55. Although the value of an increase in the interest tax shield may be positive, firms are
most apt to restrict borrowing if the:
56. According to pecking-order theory, managers will often choose to finance with:
57. A firm's capital structure is represented by its mix of:
58. Restructuring a firm involves changing the:
59. MM Proposition I without taxes states that:
60. What is the return on equity for a firm with a return on assets of 15%, a return on debt of
10%, and a 0.75 debt-equity ratio?
61. An all-equity firm as operating income of $1.5 million and EPS of $2. If you ignore taxes,
and if $1 million of 20% debt were issued with the proceeds used to repurchase two-thirds of the
outstanding shares of stock, then the firm's EPS would:
62. A firm currently has operating income of $4 million, interest expense of $2 million, and
EPS of $2. How low can operating income drop before EPS are reduced by half, to $1? Ignore
taxes.
63. According to MM, if individuals
cannot
obtain the same borrowing terms as firms, then:
64. MM proposition I states that a firm's value is unaffected by its:
65. A firm's business risk depends upon:
66. The reason that financial leverage increases shareholder risk is that there is:
67. According to MM, an increase in expected earnings per share can leave the share price
unchanged if the:
68. What is the maximum rate that can be paid on debt and maintain a WACC of 14% with an
expected return on equity of 19% in a firm with a debt-to-asset ratio of 60%? Ignore taxes.
69. Which one of the following would
not
be expected to change with changes in the firm's
capital structure?
70. If a firm's expected return on equity equals its expected return on assets, then the:
71. MM's proposition II without taxes states that the:
72. As a firm's debt-equity ratio approaches zero, the firm's expected return on equity
approaches:
73. With risky debt and MM II, the expected return on assets _____ as the debt-equity ratio
_____.
74. With the inclusion of taxes, MM I is incorrect and the capital structure of the firm can be
important due to the:
75. The interest tax shield is equal to the:
76. Any financial benefit derived from the interest tax shield accrues to the:
77. The present value of a perpetual tax shield increases as the firm's tax rate _____ and the
amount of principal _____.
78. How much debt is outstanding in a firm that has calculated the present value of a
perpetual tax shield to be $300,000 if the tax rate is 35% and the debt carries a 10% rate of
return?
