When a firm has no debt, then such a firm is known as:
(I) an unlevered firm
(II) a levered firm
(III) an all-equity firm
I only
II only
III only
I and III only
For a levered firm, _______.
as earnings before interest and taxes (EBIT) increases, the earnings per share (EPS) increases by the same percent
as EBIT increases, the EPS increases by a larger percent
as EBIT increases, the EPS decreases
none of the above
Health and Wealth Company is financed entirely by common stock which is priced to offer a 15% expected return. If the company repurchases 25% of the common stock and substitutes an equal value of debt yielding 6%, what is the expected return on the common stock after refinancing? (Ignore taxes.)
18%
21%
15%
none of the above
The M&M Company is financed by $4 million (market value) in debt and $6 million (market value) in equity. The cost of debt is 5% and the cost of equity is 10%. Calculate the weighted average cost of capital. (Assume no taxes.)
10%
15%
8%
none of the above
The MM theory with taxes implies that firms should issue maximum debt. In practice, this is not true because ______.
(I) Debt is more risky than equity
(II) Bankruptcy and its attendant costs is a disadvantage to debt
(III) The payment of personal taxes may offset the tax benefit of debt
I only
II only
III only
II and III only
Indirect costs of bankruptcy are borne principally by ______.
bondholders
stockholders
managers
the federal government
The trade-off theory of capital structure predicts that _____.
unprofitable firms should borrow more than profitable ones
safe firms should borrow more than risky ones
rapidly growing firms should borrow more than mature firms
increasing leverage increases firm value
Capital budgeting decisions that include both investment and financing decisions can be analyzed by _____.
(I) Adjusting the present value
(II) Adjusting the discount rate
(III) Ignoring financing mix
I only
II only
III only
I and II only
The Boston Company has total assets of $30 million, of which $10 million are financed by debt and $20 million by equity. The EBIT is $6 million. If the firm's tax rate is 34%, and the interest rate on debt is 10%, calculate it's after tax cash flow.
$3.96 million
$3.30 million
$2.04 million
$1.70 million