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80. Which of the following is incorrect with respect to leverage buyouts (LBOs)?
81. When a stockholder's stake is worthless the firm runs the risk of:
82. All else the same, firms facing relatively high tax rates should:
83. All else the same, firms with stable, predictable income streams will able to:
84. All of the following are examples of the costs of financial distress EXCEPT:
85. All of the following are examples of the costs of financial distress EXCEPT:
86. The two main factors that determine a firm's capital structure are:
87. JJJ Corp. has $10 million in assets and is currently financed with 100 percent equity. The
firm decides to switch to a 60 percent equity/40 percent debt structure and decides to sell $4
million of debt and use the proceeds to retire $4 million in equity today. This is an example of:
88. JJJ Corp. has $10 million in assets and is currently financed with 100 percent equity. The
firm decides to switch to a 60 percent equity/40 percent debt structure and decides to fund the
next $4 million of assets for future projects entirely with debt, resulting in the desired capital
structure at some point in the future. This is an example of:
89. We use the term
leverage
to describe the use of debt in the firm' capital structure
because:
90. If the U.S. government completely eliminated taxation at the corporate level:
91. If the U.S. government increased the corporate tax rates:
92. If bondholders of a firm in financial distress felt that they could recoup more of their
investment by renegotiating their claims with the firm and allowing it to continue to operate, what
type of bankruptcy would they probably push for?
93. Which of the following statements is correct?
94. Which of the following statements is correct?
95. Why does allowing for the existence of corporate taxation cause firms to prefer the
maximum amount of debt possible?
96. A firm faces a 30 percent tax rate and has $200m in assets, currently financed entirely
with equity. Equity is worth $10 per share, and book value of equity is equal to market value of
equity. Also, let's assume that the firm's expected EBIT is $10m. The firm is considering
switching to a 25 percent debt capital structure, and has determined that they would have to pay
a 10 percent yield on perpetual debt. What will be the firm's new ROE if they switch to the
proposed capital structure?
97. A firm faces a 30 percent tax rate and has $500m in assets, currently financed entirely
with equity. Equity is worth $100 per share, and book value of equity is equal to market value of
equity. Also, let's assume that the firm's expected EBIT is $70m. The firm is considering
switching to an 18 percent debt capital structure, and has determined that they would have to
pay an 8 percent yield on perpetual debt. How much will ROE change if they switch to the
proposed capital structure?
98. A firm faces a 30 percent tax rate and has $500m in assets, currently financed entirely
with equity. Equity is worth $100 per share, and book value of equity is equal to market value of
equity. Also, let's assume that the firm's expected EBIT is $60m. The firm is considering
switching to a 25 percent debt capital structure, and has determined that they would have to pay
a 10 percent yield on perpetual debt. How much will ROE change if they switch to the proposed
capital structure?
