1.When weighted average cost of capital (WACC) is used to value a levered firm, the interest tax shield is:
A. ignored.
B. considered by deducting the interest payment from the cash flows.
C. automatically considered because the after-tax cost of debt is used in the WACC formula.
D. none of the above
2.In order to find the present value of the tax shields provided by debt, the discount rate used is the:
A. cost of capital
B. cost of equity
C. cost of debt
D. none of the above
3.On January 2, Michigan Mining declared a $25-per-share quarterly dividend payable on March 9th to stockholders of record on February 9. What is the latest date by which you could purchase the stock and still get the recently declared dividend?
A. February 5
B. February 6
C. February 7
D. February 8
4.A firm has a total market value of $10 million and debt has a market value of $4 million. What is the after-tax weighted average cost of capital if the before - tax cost of debt is 10%, the cost of equity is 15% and the tax rate is 35%?
A. 13%
B. 11.6%
C. 8.75%
D. None of the given answers
5.Subsidized loans have the effect of:
A. Increasing the NPV of the loan, thereby reducing the APV.
B. Decreasing the NPV of the loan, thereby reducing the APV.
C. Decreasing the NPV of the loan, thereby increasing the APV.
D. Increasing the NPV of the loan, thereby increasing the APV.
6.Calculate the current ratio:
A. 2.0
B. 1.0
C. 1.5
D. None of the above
7.Discuss some examples of the conflicts of interest that may arise between bondholders and stockholders when a firm is in financial distress.Efficiency ratios indicate:
I) How productively is the firm utilizing its assets.
II) How liquid is the firm.
III) How profitable is the firm.
IV) How highly is the firm valued by investors.
A. I only
B. II only
C. III only
D. III and IV only
8.If an individual wanted to borrow with limited liability he/she should:
A. Invest in the equity of an unlevered firm
B. Borrow on his/her own account
C. Invest in the equity of a levered firm
D. Invest in a risk-free asset like T-bills
9.Assets are listed on the balance sheet in order of:
I) Decreasing liquidity
II) Decreasing size
III) Increasing size
IV) Relative life
A. I only
B. III and IV only
C. II only
D. IV only
10.Given the following data for year-1:
Profits after taxes = $20 millions;
Depreciation = $6 millions;
Interest expense = $4 millions;
Investment in fixed assets = $12 millions;
Investment in working capital = $4 millions.
Calculate the free cash flow (FCF) for year-1:
A. $4 millions
B. $6 millions
C. $10 millions
D. none of the above
11.The difference between Total Assets of a firm and its Total Liabilities is called.
A. Net working capital
B. Net current assets
C. Net worth
D. None of the above
12.Assuming that bonds are sold at a fair price, the benefits from the tax shield go to the:
A. managers of the firm
B. bondholders of the firm
C. stockholders of the firm
D. lawyers of the firm
13.Floatation costs are incorporated into the APV framework by:
A. Adding them into the all equity value of the project.
B. Subtracting them from all equity value of the project.
C. Incorporating them into the WACC.
D. Disregarding them.
14.In order to calculate the tax shields provided by debt, the tax rate used is the:
A. average corporate tax rate
B. marginal corporate tax rate
C. average of shareholders' tax rates
D. average of bondholders' tax rates
15.Which of the following investors have the strongest tax reason to prefer dividends over capital gains?
A. Pension funds
B. Financial institutions
C. Individuals
D. Corporations
16.If a firm permanently borrows $100 million at an interest rate of 8%, what is the present value of the interest tax shield? (Assume that the tax rate is 30%)
A. $8.00 million
B. $5.6 million
C. $30 million
D. $26.67 million
E. None of the above