Question :
29.If a firm increases its use of financial leverage, then : 1325734
29.If a firm increases its use of financial leverage, then what would we generally expect for the effect of that increased leverage to have on an EPS that is already very low?
a.EPS would be lower with financial leverage
b.EPS would always be the same with financial leverage
c.EPS would be higher with financial leverage
d.it is not possible to determine
30.If a firm increases its use of financial leverage, then what would we generally expect for the shareholders of that firm to
a.lower their demand for return on their investment.
b.remain indifferent with respect to their return on investment.
c.increase their demand for return on their investment.
d.it is not possible to tell what will happen.
31.Firm X plans to increase its financial leverage by issuing debt and using the proceeds to repurchase equity. If you assume that the Modigliani and Miller assumptions hold, then the effect of this increasing financial leverage transaction should
a.increase the market value of Firm X’s shares.
b.have no effect on the market value of Firm X’s shares.
c.decrease the market value of Firm X’s shares.
d.it is not possible to tell what will happen.
32.Perfect capital markets describe markets without frictions such as
a.taxes.
b.trading costs.
c.problems transferring information between managers and investors.
d.all of the above.
33.In a world without taxes, distress costs, or agency problems, calculate the value of Lever Co. if its perpetual EBIT is expected to be $1,000,000 per year based upon total debt of $200,000. The firm’s cost of debt is 5% and its required return on firm’s assets is 10%.
a.$19,800,000
b.$10,000,000
c.$9,900,000
d.none of the above
34.Roy’s Toy, Inc. currently has no debt outstanding. Its current cost of equity is 12% and the current value of the company is $20,000,000. Roy is proposing to finance 1/4 of its assets with debt at a cost of 8% per annum. What will be Roy’s cost of levered equity if things go as planned? Ignore any tax effects.
a.12.00%
b.13.00%
c.13.33%
d.none of the above
35.Nuclear Widgets has a current cost of levered equity equal to 13%. Its return on assets is 12% and its cost of debt is 8%. Nuclear Widgets has borrowed a total of $5,000,000. What is the current value of Nucler Widgets’ equity? Ignore the effect of taxes.
a.$1,250,000
b.$20,000,000
c.the problem yields a negative number which means the problem is not realistic
d.not enough information is given
36.A newly appointed CFO of a company tells you that he needs to determine the required return on unlevered equity should his firm completely deliver. He further tells you that the required return on assets is 10% and that his cost of debt is 3% based upon a current borrowed amount of $50,000,000 but he doesn’t know the market value of his equity. What is the required return on equity should his firm eliminate all of its debt?
a.10.0%
b.11.5%
c.13.0%
d.it is impossible to tell
37.In a world without distress costs or agency problems, calculate the value of Bilever Co. if its perpetual EBIT is expected to be $1,000,000 per year based upon total debt of $200,000. The firm’s cost of debt is 5% and its required return on firm’s assets is 10%. Assume that Bilever is in the 30% marginal tax rate.
a.$14,000,000
b.$7,000,000
c.$5,600,000
d.none of the above
38.Big Corp. anticipates issuing $5,000,000 of debt to repurchase equity. If Big can issue the debt to yield 8% per year, then what is the increase in value to Big if it issues the debt and is subject to a 34% marginal tax rate?
a.$136,000
b.$400,000
c.$1,700,000
d.none of the above
