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Exam 13: Leverage and Capital Structure

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Question 31

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Janus International is an all-equity company.You are given the following information for Janus International: EBIT = $880 000 forever Corporate tax rate = 25% Cost of equity = 12% The company is in the process of issuing $1 000 000 of bonds at par that carry a 11.50% annual coupon.What is the levered value of the firm?

A) $8 000 000
B) $5 528 750
C) $5 750 000
D) $9 800 000
E) $6 655 250

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Question 32

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The maximum firm value,according to the static theory of capital structure,occurs at a point where the:

A) financial distress costs are equal to zero
B) value of the firm equalises the costs of financial distress with the present value of the tax shield on debt
C) value of a levered firm initially begins to exceed that of an unlevered firm
D) value of the firm is equal to the value defined by M&M Proposition I,with tax
E) value of the firm,as defined by M&M Proposition I,with tax,is exactly equal to the value of the firm,as defined by M&M Proposition I,without tax

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Question 33

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A new board of directors of the BMP Corporation is considering a capital restructuring as currently BMP uses no-debt financing.The board is considering issuing $3 400 000 of debt and using the funds to retire one quarter of 160 000 shares that the company currently has outstanding.The interest rate on debt is 8.30% per annum.Calculate the break-even level of earnings before interest and taxes (EBIT) between both capital structure options:

Less Debt Inc.just revised its capital structure such that the firm's debt-equity ratio decreased from 0.80 to 0.40.Those individual investors who prefer the old capital structure:

Deltona,USA is a development company that is currently financed with 100 per cent equity.There are 15 000 shares outstanding at a market price of $50 a share.Deltona has earnings before interest and taxes (EBIT) of $20 000.The firm has decided to issue $250 000 of debt at a rate of 8 per cent and use the proceeds to repurchase shares.Theresa owns 500 shares of Deltona and wants to use homemade leverage to offset the leverage used by Deltona.Theresa should:

Financial risk is defined as the:

Which one of the following best defines legal bankruptcy?

T.L.C.Enterprises just revised its capital structure from a debt-equity ratio of 0.30 to a debt-equity ratio of 0.45.The firm's shareholders who prefer the old capital structure should:

Assume both corporate taxes and financial distress costs apply to a firm.Given this,the static theory of capital structure illustrates that: