Study Guide for Final Exam
1. (TCO B) Which of the following statements concerning the MM extension with growth is NOT CORRECT? (a) The tax shields should be discounted at the unlevered cost of equity.
(b) The value of a growing tax shield is greater than the value of a constant tax shield.
(c) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.
(d) For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions.
(e) The total value of the firm is independent of the amount of debt it uses. (Points: 20)
2. (TCO D) Which of the following statements is most CORRECT? (a) In a private placement, securities are sold…show more content…
(b) An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.
(c) If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.
(d) An increase in the company's degree of operating leverage is likely to encourage a company to use more debt in its capital structure.
(e) An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure. (Points: 20)
4. (TCO G) Chapter 7 of the Bankruptcy Act is designed to do which of the following? (a) Protect shareholders against creditors.
(b) Establish the rules of reorganization for firms with projected cash flows that eventually will be sufficient to meet debt payments.
(c) Ensure that the firm is viable after emerging from bankruptcy.
(d) Allow the firm to negotiate with each creditor individually.
(e) Provide safeguards against the withdrawal of assets by the owners of the bankrupt firm and allow insolvent debtors to discharge all of their obligations and to start over unhampered by a burden of prior debt.
2. (TCO I) Suppose one British pound can purchase 1.82 U.S. dollars today in the foreign exchange market, and currency forecasters predict that the U.S. dollar will depreciate by 12.0% against the pound over the next 30 days. How many dollars will a pound buy in 30 days? (a) 1.12