1. Which of the following statements is true?
a. The tax shield on debt is equal to (interest expense)x(1 - T).
b. The Modigliani and Miller model applies only to firms that are growing
c. The tax shield on debt adds value to the firm because the investor pays taxes on interest income.
d. If a firm's debt has a yield greater than the risk free rate, then the debt will have a beta greater than 0.
e. According to Modigliani and Miller, the value of a levered firm is equal to the present value of its interest tax shields.
2. Which of the following statements is true?
a. In the Modigliani and Miller model, the firm's interest tax shields are discounted at the firm's required return on debt.
b. The value of a levered firm will always be less than the value of an unlevered firm
c. Issuing new debt with a lower coupon rate will increase the value of a firm's tax shields
d. Most firms' debt has a beta of zero because it is risk free.
e. The value of a levered firm will always be greater than the value of an unlevered firm.
3. Which of the following statements is false?
a. In the compressed APV model, the firm's interest tax shields are discounted at the unlevered cost of equity.
b. In the Modigliani and Miller model, the firm's interest tax shields are discounted at the firm's required return on debt.
c. In the corporate valuation model, the firm's interest tax shields are incorporated into the weighted average cost of capital
d. If the corporate tax rate were lowered, then the value of the unlevered firm would decline.
e. If the corporate tax rate were lowered, then the value of the interest tax shield would decline.
4. Which of the following statements is true?
a. In an underwritten issue, the issuing company might not receive all of the money it had anticipated.
b. An underwriter is an insurance company that insures the IPO issue
c. An underwriting syndicate is the collection of venture capitalists who work together to maximize the value of their investment in the firm.
d. In a best efforts sale, the investment banker guarantees the proceeds of the securities issue should his best efforts to sell the securities fail.
e. In an underwritten securities issue, the investment bank guaranties that all of the securities will be issued and the company will receive all of the money it is trying to raise.