VL - VD = VE = $7,620 - $3,000 = $4,620 RE = RU + (RU - RD) × D/E × (1 - TC) = .12 + [(.12 - .07) × ($3,000 ÷ $4,620) × (1 - .34)] = .12 + .02143 = .14143 = 14.14%
(2)
46. A key assumption of MM's Proposition I without taxes is:
All of these.
that financial leverage increases risk.
that individuals must be able to borrow on their own account at rates equal to the firm.
managers are acting to maximize the value of the firm.
(2)
that individuals can borrow on their own account at rates less than the firm.
47. The proposition that the cost of equity is a positive linear function of
capital structure is called:
MM Proposition II.
the efficient markets hypothesis. the capital asset pricing model. MM Proposition I. the law of one price.
(2)
48. The interest tax shield has no value for a firm when:
I. the tax rate is equal to zero.
II. the debt-equity ratio is exactly equal to 1. III. the firm is unlevered.
IV. a firm elects 100% equity as its capital structure.
II, III, and IV only
I and III only I, III, and IV only I, II, and IV only
II and IV only
(2)
49. Joe's Leisure Time Sports is an unlevered firm with an after-tax net
income of $86,000. The unlevered cost of capital is 10% and the tax rate is 34%. What is the value of this firm?
$781,818
$946,000 $567,600 $1,152,400 $860,000
VU = $86,000 ÷ .10 = $860,000
(2)
50. The firm's capital structure refers to:
how much cash the firm holds.
the mix of debt and equity used to finance the firm's assets. the way a firm invests its assets. the amount of dividends a firm pays. the amount of capital in the firm.
(0)
51. Covenants restricting the use of leasing and additional borrowings
primarily protect:
None of these.
→
the debtholders from the transfer of assets. the equityholders from added risk of default.
the debtholders from the added risk of dilution of their claims. the management from having to pay agency costs