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A firm has a weighted average cost of capital of 11.28 percent and a cost of equity of 14.7 percent.The debt-equity ratio is .72.There are no taxes.What is the firm's cost of debt?


A) 6.53 percent
B) 6.27 percent
C) 6.44 percent
D) 7.23 percent
E) 7.08 percent

F) B) and D)
G) A) and E)

Correct Answer

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Catapult Movers has determined that $98,000 is the break-even level of earnings before interest and taxes for the two capital structures it is considering.The one structure consists of all equity with 30,000 shares of stock.The second structure consists of 20,000 shares of stock and $400,000 of debt.What is the interest rate on the debt?


A) 3.48 percent
B) 3.95 percent
C) 5.14 percent
D) 7.31 percent
E) 8.17 percent

F) A) and B)
G) A) and C)

Correct Answer

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The Bethlehem Inn is an all-equity firm with 9,000 shares outstanding at a value per share of $26.80.The firm is issuing $39,932 of debt and using the proceeds to reduce the number of outstanding shares.How many shares of stock will be outstanding once the debt is issued? Ignore taxes.


A) 7,970 shares
B) 7,510 shares
C) 7,846 shares
D) 8,030 shares
E) 7,561 shares

F) A) and B)
G) B) and E)

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The level of financial risk to which a firm is exposed is dependent on the firm's:


A) tax rate.
B) debt-equity ratio.
C) return on assets.
D) level of earnings before interest and taxes.
E) operational level of risk.

F) A) and B)
G) C) and D)

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Jericho Snacks is an all-equity firm with estimated earnings before interest and taxes of $624,000 annually forever.Currently, the firm has no debt but is considering borrowing $725,000 at 6.75 percent interest.The tax rate is 35 percent and the current cost of equity is 15.2 percent.What is the value of the levered firm?


A) $3,187,271
B) $2,769,535
C) $3,307,271
D) $2,922,171
E) $3,506,418

F) A) and C)
G) All of the above

Correct Answer

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Which one of the following is a key provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005?


A) Disallowance of bankruptcy prepacks
B) Right granted to creditors to file their own reorganization plan once a firm is in bankruptcy for 18 months
C) Disallowance of all management bonus payments while a firm is in bankruptcy
D) Requirement that only creditors can file reorganization plans for a bankrupt firm
E) Requirement for all Chapter 11 bankruptcies to be converted to Chapter 7 bankruptcies after 18 months

F) B) and D)
G) D) and E)

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According to M&M Proposition I with taxes, the value of a levered firm will increase when the:


A) value of the unlevered firm increases.
B) tax rate is decreased.
C) debt-equity ratio is lowered.
D) interest rate on the debt is lowered.
E) interest rate on the debt is increased.

F) B) and D)
G) None of the above

Correct Answer

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Green Tea House has a tax rate of 35 percent and an interest tax shield valued at $8,046 for the year.How much did the firm pay in annual interest?


A) $2,816.10
B) $2,304.11
C) $23,468.09
D) $21,107.99
E) $22,988.57

F) B) and E)
G) B) and C)

Correct Answer

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Weston Mines has a cost of equity of 14.9 percent, a pretax cost of debt of 7.3 percent, and a return on assets of 12.6 percent.Ignore taxes.What is the debt-equity ratio?


A) .52
B) .84
C) .43
D) .77
E) .56

F) B) and C)
G) A) and E)

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Traindriver Engineering has determined that $74,000 is the break-even level of earnings before interest and taxes for the two capital structures it is considering.The one structure consists of all equity with 20,000 shares of stock.The second structure consists of 17,000 shares of stock and $110,000 of debt.What is the interest rate on the debt?


A) 5.41 percent
B) 5.88 percent
C) 7.07 percent
D) 9.24 percent
E) 10.09 percent

F) B) and D)
G) D) and E)

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Kline Construction is an all-equity firm that has projected perpetual earnings before interest and taxes of $628,000.The current cost of equity is 17.6 percent and the tax rate is 35percent.The company is in the process of issuing $4.3 million of 8.3 percent annual coupon bonds at par.What is the levered value of the firm?


A) $3,824,318
B) $3,541,085
C) $3,422,225
D) $2,713,185
E) $3,385,695

F) A) and B)
G) A) and E)

Correct Answer

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The Outlet Mall has a cost of equity of 16.3 percent, a pretax cost of debt of 7.9 percent, and a return on assets of 13.4 percent.Ignore taxes.What is the debt-equity ratio?


A) .46
B) .53
C) .44
D) .59
E) .57

F) A) and B)
G) B) and E)

Correct Answer

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Which one of the following statements matches M&M Proposition I without taxes?


A) The cost of equity capital has a positive linear relationship with a firm's capital structure.
B) The dividends paid by a firm determine the firm's value.
C) The cost of equity capital varies in response to changes in a firm's capital structure.
D) The value of a firm is independent of the firm's capital structure.
E) The value of a firm is dependent on the firm's capital structure.

F) B) and D)
G) C) and E)

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In the process of liquidation, some types of claims receive preference over other claims.Which one of the following determines which type of claim is paid first?


A) Technical insolvency definition
B) Absolute priority rule
C) Accounting insolvency definition
D) Chapter 7 of the Federal Bankruptcy Reform Act of 1978
E) Securities and Exchange Commission

F) All of the above
G) None of the above

Correct Answer

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Flour Mills is an all-equity firm with a total market value of $891,860.The firm has 38,000 shares of stock outstanding.Management is considering issuing $275,000 of debt at an interest rate of 7.5 percent and using the proceeds on a stock repurchase.Ignore taxes.How many shares can the firm repurchase if it issues the debt securities? (Round the number of shares repurchased down to the nearest whole share.)


A) 11,717 shares
B) 11,618 shares
C) 11,647 shares
D) 11,656 shares
E) 11,699 shares

F) B) and E)
G) A) and C)

Correct Answer

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Chick 'N Fish is considering two different capital structures.The first option is an all-equity firm with 22,500 shares of stock.The second option consists of 18,750 shares of stock plus $120,000 of debt at an interest rate of 7.8 percent.Ignore taxes.What is the break-even level of earnings before interest and taxes (EBIT) between these two options?


A) $62,813
B) $54,204
C) $60,410
D) $56,150
E) $61,290

F) C) and D)
G) B) and C)

Correct Answer

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Which one of the following terms is inclusive of both direct and indirect bankruptcy costs?


A) Financial distress costs
B) Capital structure costs
C) Financial leverage
D) Homemade leverage
E) Cost of capital

F) D) and E)
G) A) and B)

Correct Answer

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Brick House Markets has a tax rate of 34 percent and taxable income of $308,211.What is the value of the interest tax shield if the interest expense is $39,700?


A) $14,887
B) $15,010
C) $15,595
D) $13,498
E) $16,023

F) A) and C)
G) A) and D)

Correct Answer

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TriState Landscape and Turf is an all-equity firm with a total market value of $740,000 and 30,000 shares of stock outstanding.Management is considering issuing $150,000 of debt at an interest rate of 7.25 percent and using the proceeds on a stock repurchase.Ignore taxes.How many shares will the firm repurchase if it issues the debt securities? (Round the number of shares repurchased down to the nearest whole share.)


A) 6,167 shares
B) 6,232 shares
C) 6,042 shares
D) 6,207 shares
E) 6,081 shares

F) None of the above
G) B) and E)

Correct Answer

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