Levered firms optimal capital structure

Question

Question 1: A taxpaying, levered firm's optimal capital structure:

• is 100 percent equity financing.
• consists of equal amounts of debt and equity financing.
• is the mixture of debt and equity financing that minimizes the firm's aftertax cost of debt.
• is the mixture of debt and equity financing that minimizes the weighted average cost of capital.
• is 100 percent debt financing.

Question 2: SmithKline Company's bonds are currently selling for $1,157.75 per $1000 par-value bond. The bonds have a 10 percent coupon rate and will mature in 10 years. What is the approximate yield to maturity?

• 6.96%
• 7.69%
• 11.0%
• 12.1%

Question 3: Which of the following is true regarding bonds?

• Most bonds do not carry default risk.
• Municipal bonds are free of default risk.
• Bonds are not sensitive to changes in the interest rates.
• Moody's and Standard and Poor's provide information regarding a bondâ's interest rate risk.
• None of the above is true

Question 4: Two years ago, Maple Enterprises issued six percent, 20-year bonds and Temple Corp issued six percent, 10-year bonds. Since their time of issue, interest rates have increased. Which of the following statements is true of each firm's bond prices in the market, assuming they have equal risk?

• Maple's decreased more than Temple's
• Temple's decreased more than Maple's
• Maple's increased more than Temple's
• They are both priced the same

Question 5: A call provision in a bond agreement grants the issuer the right to:

• repurchase the bonds prior to maturity at a pre-specified price.
• replace the bonds with equity securities.
• repurchase the bonds after maturity at a pre-specified price.
• change the coupon rate, provided the bondholders are notified in advance.
• buy back the bonds on the open market prior to maturity.