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Material Type: Quiz; Class: Theory of Corporate Finance; Subject: Finance; University: California State University - Fullerton; Term: Unknown 1989;
Typology: Quizzes
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compared with the risk they would bear if no debt were used.
a. True
b. False
a. Since debt financing raises the firm's financial risk, raising a company’s debt
ratio will always increase the company’s WACC.
b. Since debt financing is cheaper than equity financing, raising a company’s
debt ratio will always reduce the company’s WACC.
c. Increasing a company’s debt ratio will typically reduce the marginal cost of
both debt and equity financing; however, it still may raise the company’s
d. Statements a and c are correct.
e. None of the statements above is correct.
a. An increase in the company’s operating leverage.
b. An increase in the corporate tax rate.
c. A decrease in the company’s marketable fixed assets.
d. All of the above.
almost 100 percent debt.
a. True
b. False
capital structure would be almost 100 percent debt.
a. True
b. False
(The following information applies to the next two problems.)
The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a
corporate tax rate of 40 %. Kimberly uses $400,000 of 11 % debt financing, and the cost of
equity to an unlevered firm in the same risk class is 15 %.
a. $400,
b. $460,
c. $560,
d. $625,
e. $775,
a. 17 %
b. 18 %
c. 19 %
d. 20 %
e. 21 %
the coupon rate will rise to 9%. The company can repurchase stock to complete the
capital structure change, and the cost of equity will increase from 15% to 20%.
IMRA’s current EBIT is $40M, and the expected growth rate is 0. Should the
company make this change in its capital structure? (Tax rate is 40%).
a. Yes.
b. No.
Answers:
U = EBIT (1 - T) / k sU
L
U
L
L
k sL = k sU
k
k
s
d
=$ 30 +$ 150. 4 =$ 180. 4 million.
0.1 5
[$ 40 - $ 30 * 8 %)(1-0. 4 )
Vold =$ 30 +
=$ 40 +$ 109. 2 =$ 149. 2 million.
[$ 40 - $ 40 * 9 %)(1-0. 4 )
Vnew =$ 40 +