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Exam 16: Capital Structure

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Question 21

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Which of the following statements is FALSE?

A) The relative proportions of debt,equity,and other securities that a firm has outstanding constitute its capital structure.
B) The most common choices are financing through equity alone and financing through a combination of debt and equity.
C) The project's net present value (NPV) represents the value to the new investors of the firm created by the project.
D) When corporations raise funds from outside investors,they must choose which type of security to issue.

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Question 22

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The following equation: Can be used to calculate all of the following EXCEPT:

A) the cost of capital for the firm's assets.
B) the levered cost of equity.
C) the unlevered cost of equity.
D) the weighted average cost of capital.

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Question 23

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Differences in the magnitude of financial distress costs and volatility of cash flows across industries do not impact the choice of leverage.

Which of the following statements is FALSE?

A firm requires an investment of $30,000 and borrows $10,000 at 6%.If the return on equity is 15% and the tax rate is 30%,what is the firm's WACC?

A firm requires an investment of $20,000 and will return $25,000 after one year.If the firm borrows $10,000 at 7% what is the return on levered equity?

In a setting where there is no risk that a firm will default,leverage ________ the risk of equity.

What are indirect costs of financial distress?

Use next year's Cash Flow Forecast for Blank Company to answer the following questions: -Suppose Blank Company has only one project,as forecast above,and an unlevered cost of equity of 8%.If the company borrows $10,000 at 5% to make the investment,what is the return to equity holders if demand is weak?

A firm will give a one-time cash flow of $22,000 after one year.If the project risk requires a return of 11%,what is the levered value of the firm with perfect capital markets?

A project will give a one-time cash flow of $20,000 after one year.If the project risk requires a return of 10%,what is the levered value of the firm with perfect capital markets?

Which of the following statements is FALSE?

Use next year's Cash Flow Forecast for Blank Company to answer the following questions: -Suppose Blank Company has only one project,as forecast above,and an unlevered cost of equity of 8%.If the company borrows $10,000 at 5% to make the investment,what is expected return to equity holders?

Financial managers prefer to choose the same debt level no matter which industry they operate in.

Use the information for the question(s) below. Consider two firms,With and Without,that have identical assets that generate identical cash flows.Without is an all-equity firm,with 1 million shares outstanding that trade for a price of $24 per share.With has 2 million shares outstanding and $12 million in debt at an interest rate of 5%. -Assume that MM's perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5000 of your own money to invest and you plan on buying With stock.Using homemade (un) leverage,how much do you need to invest at the risk-free rate so that the payoff of your account will be the same as a $5000 investment in Without stock?

A firm requires an investment of $40,000 and borrows $10,000 at 8%.If the return on equity is 20%,what is the firm's pre tax WACC?

Consider the following equation for the question(s) below: -The A in the equation above represents

What effect does debt have on a firm's weighted average cost of capital?

The optimal capital structure depends on ________ such as taxes,distress costs and agency costs.

A firm requires an investment of $30,000 and borrows $10,000 at 6%.If the return on equity is 15%,what is the firm's pre tax WACC?