Question : 61.TransMetro Incorporated has EBIT of $1 million for the current : 1325737

 

 

61.TransMetro Incorporated has EBIT of $1 million for the current year. On the firm balance sheet, there is $6 million of debt outstanding that carries a coupon rate of 15 percent. Investors seek a return of 20 percent on the firm, and the firm has a corporate tax rate of 40%. What is the present value of the firm’s tax shields?

a.$2,000,000

b.$2,200,000

c.$2,400,000

d.$2,700,000

 

 

 

62.Which statement correctly describes proposition I of Modigliani and Miller?

a.The value of the firm is independent of its capital structure.

b.If there is no default risk, firms should exclusively use debt to finance projects.

c.If there is no default risk, firms should exclusively use equity to finance projects.

d.The value of the firm’s tax shields depends solely on the amount of debt issued.

 

 

 

63.Lightyear Technology Corporation finances its operations with $75 million in stock with a required return of 12 percent and $45 million in bonds with a required return of 8 percent. Suppose the firm issues $15 million in additional bonds at 8 percent, using the proceeds to retire $15 million worth of equity. What will be the firm’s new debt to equity ratio? (Assume zero taxes and perfect capital markets)

a.0.75

b.0.90

c.1.00

d.1.10

 

 

 

64.Burdell Scientific Incorporated finances its operations with $40 million in stock with a required return of 12 percent and $10 million in bonds with a required return of 6 percent. Suppose the firm issues $15 million in additional bonds at 8 percent, using the proceeds to retire $15 million worth of equity. If the WACC remains the same, what will be the firm’s new cost of equity? (Assume zero taxes and perfect capital markets)

a.15.60%

b.15.00%

c.14.40%

d.13.80%

 

 

 

65.Bulldog Electronics Corporation finances its operations with $75 million in stock with a required return of 12 percent and $45 million in bonds with a required return of 8 percent. Suppose the firm issues $15 million in additional bonds at 8 percent, using the proceeds to retire $15 million worth of equity. If the WACC remains the same, what will be the firm’s new cost of equity? (Assume zero taxes and perfect capital markets)

a.12.50%

b.13.00%

c.14.00%

d.14.40%

 

 

 

66.Oak Barrel Company has net operating income of $10 million. Further, the company has $80 million of debt outstanding with a required rate of return of 7 percent; the required rate of return on the industry is 11 percent; and the corporate tax rate is 40 percent. What is the gain from leverage if the personal tax rate on stock income is 20 percent and the personal tax rate on debt income is 30 percent?

a.$22.34 million

b.$23.77 million

c.$24.63 million

d.$25.14 million

 

 

 

67.Oak Barrel Company has net operating income of $10 million. Further, the company has $80 million of debt outstanding with a required rate of return of 7 percent; the required rate of return on the industry is 12 percent; and the corporate tax rate is 35 percent. What is the gain from leverage if the personal tax rate on stock income is 15 percent and the personal tax rate on debt income is 30 percent?

a.$22.34 million

b.$19.41 million

c.$16.86 million

d.$12.19 million

 

 

 

68.Oak Barrel Company has net operating income of $10 million. Further, the company has $80 million of debt outstanding with a required rate of return of 7 percent; the required rate of return on the industry is 11 percent; and the corporate tax rate is 40 percent. What is the value of the Oak Barrel Company?

a.$86.55 million

b.$83.77 million

c.$81.46 million

d.$72.28 million

 

 

 

69.Which statement is FALSE regarding empirical evidence of capital structures?

a.Capital structures show strong industry patterns.

b.Economy wide leverage ratios are consistent across countries.

c.Leverage ratios are negatively related to the cost of financial distress.

d.Within industries, the most profitable companies borrow the least.

 

 

 

70.In a world with only company-level taxation of operating profits, no costs of bankruptcy, and tax-deductible interest payments, what is the optimal corporate strategy?

a.The firm should use all equity to maximize firm value.

b.The firm should use all debt to maximize its value.

c.The firm’s value is independent of the way it is financed.

d.The firm should maximize the use of preferred stock to create value.