Question :
39.Large Corp. anticipates issuing $5,000,000 of debt to repurchase equity. : 1325735
39.Large Corp. anticipates issuing $5,000,000 of debt to repurchase equity. If Large can issue the debt to yield 8% per year, then what is the single year increase in cash flow to Large if it issues the debt and is subject to a 34% marginal tax rate?
a.$136,000
b.$400,000
c.$2,720,000
d.none of the above
40.If we start with the M&M perfect capital markets assumption and then relax the no tax assumption on corporations, then we would expect for firms that go from no leverage to some leverage to
a.have the levered version of the firm at least as valuable as the no-leverage firm.
b.have the no-leverage version of the firm at least as valuable as the levered firm.
c.change in value depending upon the level of personal taxes.
d.none of the above.
41.You need to calculate the gains from using $1,000,000 of additional leverage on the average company in the U.S. economy. You are told that the average investor’s personal tax rate on income from stock is 15% and that investors can generally avoid personal taxes on income from debt. You are also told that the average corporation is subject to the 35% marginal corporate tax rate. What is the benefit to firm value for this additional debt load?
a.$650,000
b.$447,500
c.$350,000
d.none of the above
42.On-the-Fence Co. (OTF) is considering issuing an additional $5,000,000 perpetual debt. It is subject to a 35% marginal corporate tax rate but is being told that the costs of financial distress on that additional debt is $1,000,000. What should OTF do?
a.Do not issue the debt
b.Issue the debt
c.It doesn’t matter what it does as M&M with perfect markets holds
d.none of the above
43.Costs associated with the requirement that management divert its attention away from strategically managing a corporation in favor of spending time with financial attorneys could be best described as
a.direct bankruptcy costs.
b.indirect bankruptcy costs.
c.managerial-shareholder related agency costs.
d.none of the above.
44.Firm Y issued $100,000,000 of bonds last year for the purpose of building a new widget manufacturing plant. Firm Y instead used the proceeds to fund Blackjack gamblers in Las Vegas. Which of the following best describes the general problem that Y’s investors must deal with?
a.The Underinvestment Problem
b.The Overinvestment Problem
c.The Asset Substitution Problem
d.The Enron Problem
45.Lord Brack has recently sold 90% of his company to the general public but he remains the CEO of the firm. Unfortunately, the Lord prefers to eat $1,000 lunches in the corporate dining room (for which he does not reimburse the company). What is Lord Brack’s cost of these lunches?
a.$1,000
b.$900
c.$100
d.none of the above
46.Molotov Cranberry Cocktail Corp finds that the value of the firm is equal to $100,000,000 with no debt. It knows that if it issues new debt, the value of the tax shield will be $3,000,000 while the value of the bankruptcy costs, outside agency costs and inside agency costs will be $1,000,000, $2,000,000, and $4,000,000 in that order. What will the value of Molotov be if it issues the debt?
a.$0
b.$96,000,000
c.$100,000,000
d.none of the above
47.Fidget Inc. is currently worth $10,000,000. It is told that if it issues $1,000,000 of perpetual debt (and uses the proceeds to repurchase equity) the value of the firm will increase by $290,000. If the total bankruptcy costs and agency costs combine to be a cost of $20,000, what is Fidget’s marginal corporate tax rate? Ignore personal taxes.
a.29%
b.30%
c.31%
d.none of the above
48.You are evaluating a company and have found a new way to calculate the present value of bankruptcy costs, agency costs of outside equity as well as debt. You find that the agency costs of outside equity is $100 while the agency cost of outside debt is $1,000,000. The costs of bankruptcy are also $1,000,000. What type of firm does most likely describe?
a.a firm with too little leverage
b.a firm with too much leverage
c.a firm with too much equity
d.a firm that should disregard its agency costs
49.If you were to look at leverage for companies in a country where there is a very high cost of attorneys and accountants, all other things being equal you would expect
a.that firms in those countries would utilized less leverage than in other countries.
b.that firms in those countries would utilized more leverage than in other countries.
c.that firms in those countries would utilize no leverage.
d.that firms in those countries would utilize as much leverage as is mathematically possible.
50.DebtCo. has $100,000,000 of perpetual debt outstanding with a cost of 9%. DebtCo. is currently subject to a 30% marginal tax rate. If a new president is elected who surprisingly announces that firms like DebtCo. will now be subject to a 35% marginal tax rate, what should be the effect of the immediate value change on DebtCo.?
a.-$35,000,000
b.-$5,000,000
c.$5,000,000
d.$35,000,000
