Question 1

In a Chapter 7 bankruptcy, which one of the following will have the highest priority when a bankrupt firm's assets are distributed if the absolute priority rule is followed?

preferred stockholders

secured creditors

unsecured creditors

common shareholders

Question 2

According to the static theory of capital structure, a firm borrows up to which one of the following points?

point where the firm is financed totally with debt

point where an additional dollar of debt would have a benefit exactly equal to its cost

point where WACC equals the debt-equity ratio

point where the debt-equity ratio equals 1.0

Question 3

According to M&M Proposition I with taxes, the value of a levered firm is equal to the value of the unlevered firm plus which one of the following?

current market value of the debt

par value of the debt

present value of the depreciation tax shield

present value of the interest tax shield

Question 4

Which one of the following is the equity risk arising from the daily operations of a firm?

Business risk

Financial risk

Operating risk

Strategic risk

Question 5

Which one of the following statements is correct?

To maximize the value of a firm you need to maximize the firm's WACC.

A Chapter 7 bankruptcy is a legal process for reorganizing a firm.

Investors can use homemade leverage to offset firm leverage.

To maximize the value of a firm you need to borrow as much as you can.

Question 6

Different borrowers have different risks of bankruptcy, and bankruptcy is costly to lenders. Therefore, lenders charge higher rates to borrowers judged to be more at risk of going bankrupt

True

False

Question 7

A firm has 100,000 shares of stock outstanding. The firm is considering borrowing $1.3 million at 7.5% interest and using the loan proceeds to repurchase 20,000 shares of stock. What is the value of the firm? Ignore taxes.

$5.20 million

$5.98 million

$6.50 million

$7.25 million

Question 8

A firm has a debt-equity ratio of 1.0. The required return on the firm's assets is 16.1% and the pre-tax cost of debt is 9.1%. Ignore taxes. What is the firm's cost of equity?

15.3%

18.2%

23.1%

21.7%

Question 9

A company is an all-equity firm that has projected earnings before interest and taxes (EBIT) of $500,000 forever. The current cost of equity rs = 10% and the tax rate T = 30%. The company is in the process of issuing $1.5 million of bonds at par that carry a 6% annual coupon. What is the unlevered value of the firm (in millions)? (Note: You should use MM capital structure model with corporate taxes, but without personal taxes and bankruptcy costs. The formula for the value of unlevered firm: VU = EBIT x (1-T) / rs)._______

$2.05 million

$2.23 million

$2.86 million

$3.50 million

Question 10

According to the information from Question 9, what is the levered value of the firm (in millions)? (Note: The value of levered firm VL = VU + Present value of annual interest tax shield)_______

$3.95 million

$3.76 million

$3.22 million

$2.96 million