Finance Chapter 16 2 Proposition Without Taxes States That Firms

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 has 1 million shares outstanding with a market value of $10 million. It does not pay tax and has an

operating income of $1.5 million. If $2 million of 10% debt is issued and the proceeds used to repurchase shares of stock,

then the firm’s EPS:

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.

A firm increases its debt ratio from 50% to 60%. In the absence of taxes, an investor can offset the change in capital structure

by:

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, leverage may increase expected earnings per share but still leave the share price unchanged because:

68.

A firm has a WACC of 14%, an expected return on equity of 19%, and a debt-to-asset ratio of 60%. If the firm does not pay

tax, what is the interest rate on the debt?

69.

In the absence of taxes, 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’s Proposition II, the expected return on assets _____ as the debt-equity ratio _____.

74.

When a firm pays tax, MM’s Proposition I no longer holds, 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 as the amount of the debt_____.

78.

How much debt is outstanding if the present value of a perpetual tax shield is $300,000, the tax rate is 35% and the interest

rate on the debt is 10%?

79.

What is the expected rate of return to equity holders if the firm has a tax rate of 35%, the interest rate on debt is 10%, WACC

is 15%, and the debt-asset ratio is 60%?

80.

When corporate taxes and the cost of financial distress are taken into consideration, the market value of a firm is equal to the

value of the all-equity firm _____ the PV of the tax shield _____ the costs of financial distress.

81.

According to the trade-off theory, if the PV of the tax shield generated by debt is equal to the PV of the financial distress

costs, then the:

82.

Which ranking of financing from most preferred to least preferred is predicted by the pecking-order theory?

83.

Debt may be the preferred form of external financing for many firms because:

84.

Which one of the following statements is false according to MM’s proposition I?

85.

Debt usage will have an effect on:

86.

Leverage will _____ shareholders’ expected return and ______ their risk.

87.

Calculate the firm’s expected return on its assets if its expected return on debt is 10%, its expected return on equity is 20%,

and the company cost of capital is 14%.

88.

A firm with a debt-equity ratio of 0.5, a return on assets of 14%, and a return on debt of 8%, will have a return on equity of:

89.

As the debt-equity ratio decreases when debt is not risk free:

90.

One advantage of debt financing over equity financing is the:

91.

Those who benefit from the interest tax shield are:

92.

When a corporation issues permanent debt, its value:

93.

When corporate taxes are considered, how does leverage affect the WACC?

94.

According to the trade-off theory, optimal capital structure occurs when:

95.

The possibility of bankruptcy will do all of the following except:

96.

Costs of financial distress are greater when a firm increases its:

97.

Which one of the following statements is true regarding the trade-off theory?

98.

According to the trade-off theory, capital structure is a trade-off between:

99.

The pecking-order theory suggests that less profitable firms borrow more because:

100.

Financial slack:

101.

Which one of these statements corresponds to MM proposition I without taxes?

102.

Which one of these statements correctly applies to an unlevered firm that pays no taxes?

103.

Which one of these is a disadvantage to tax-paying individual investors?

104.

An increase in a corporation’s tax rate will cause:

105.

Which of the following pair of firms do you think should be more highly levered: A retailing firm with prime downtown real

estate, or a social media company whose major assets are its unique software and client loyalty?

106.

Which of the following pair of firms do you think should be more highly levered: A biotech firm which may need a large

cash injection if its drug trials are successful, or a company with a well-established market and large cash reserves?

107.

Which of the following pair of firms do you think should be more highly levered: A taxpaying company, or a company with

large tax loss carry-forwards?

108.

Which of the following pair of firms do you think should be more highly levered: A risky company, or a safe company?

Chapter 16 Test bank – Static Summary