Question 1

ABC Co.has an asset beta of 1.05 and a debt beta of 0.8.Target debt-to-equity (D/E)  ratio is 0.6.With no taxes,what is the equity beta?

Accepted Answer

A)  1.20
B)  1.05
C)  0.90
D)  0.65E) C) and D)
F) B) and D)

Question 2

Other things held constant,an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

Accepted Answer

A) True 
 B)False

Question 3

Suppose the corporate tax rate is 34%,personal tax rate on interest income is 10%,and personal tax rate on equity income is 50%.How much value will leverage add to the unlevered firm per dollar of debt?

Accepted Answer

A)  -$0.188
B)  $0.340
C)  $0.500
D)  $0.633E) B) and C)
F) A) and B)

Question 4

What is the value of the firm according to MM with corporate taxes?

Accepted Answer

A)  $475,875
B)  $528,750
C)  $587,500
D)  $646,250E) A) and B)
F) A) and C)

Question 5

Which of the following statements best describes WACC?

Accepted Answer

A)  Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC.
B)  Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its WACC.
C)  Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing. However, this action still may raise the company's WACC.
D)  Increasing a company's debt ratio will typically increase the marginal cost of both debt and equity financing. However, this action still may lower the company's WACC.E) A) and C)
F) None of the above

Exam 12: Capital Structure Decisions

Suppose the corporate tax rate is 34%,personal tax rate on interest income is 10%,and personal tax rate on equity income is 50%.How much value will leverage add to the unlevered firm per dollar of debt?

Correct Answer
verified

Other things held constant,an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

Correct Answer
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What is the value of the firm according to MM with corporate taxes?

Correct Answer
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ABC Co.has an asset beta of 1.05 and a debt beta of 0.8.Target debt-to-equity (D/E) ratio is 0.6.With no taxes,what is the equity beta?

Correct Answer
verified

Which of the following statements best describes WACC?

Correct Answer
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Exam 12: Capital Structure Decisions

Suppose the corporate tax rate is 34%,personal tax rate on interest income is 10%,and personal tax rate on equity income is 50%.How much value will leverage add to the unlevered firm per dollar of debt?

Correct AnswerverifiedShow Answer

Other things held constant,an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

Correct AnswerverifiedShow Answer

What is the value of the firm according to MM with corporate taxes?

Correct AnswerverifiedShow Answer

ABC Co.has an asset beta of 1.05 and a debt beta of 0.8.Target debt-to-equity (D/E) ratio is 0.6.With no taxes,what is the equity beta?

Correct AnswerverifiedShow Answer

Which of the following statements best describes WACC?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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