Quiz 2 Corporate Finance NAME ______________________

Apring 2013 2012 70 pts Show all work MC=5pts each

1. Find the EPS (y-axis) // EBIT (x-axis) crossover point of the following two capital structure plans. Complete the table and Draw the graph and show all the points including crossover, where line crosses y-axis, and the three EBITs below 30pts

Assets = $3,000,000 Stock Price = $20 Interest Expense = 12%

PLAN I

D/E = 1.1

Recession Expected Expansion EBIT $500,000 $1,000,000 $1,500,000 Interest Expense __________ _________ __________ Net Income __________ _________ __________

EPS __________ _________ __________

PLAN II

D/E =*…show more content…*

3. The optimal capital structure will tend to include more debt for firms with:

A. less taxable income.

B. lower probability of financial distress.

C. substantial tax shields from other sources.

D. the lowest marginal tax rate.

E. the highest depreciation deductions.

4. Your corporation has a Book Value of long-term debt = $2,000,000. The bonds were issued with a original maturity of 20 years and were sold at Par but the issue occurred 10 years ago. Coupon rate = 8% and paid semiannually. The price is 98 (Hint: this is way bonds are priced. 25pts

c. What is the cost of debt?

d. What is the Market Value of the debt?

5. The unlevered cost of capital is:

A. the cost of capital for a firm with no debt in its capital structure.

B. the cost of capital for a firm with no equity in its capital structure.

C. the interest tax shield times pretax net income.

D. equal to the profit margin for a firm with some debt in its capital structure.

E. the cost of preferred stock for a firm with equal parts debt and common stock in its capital structure.

Quiz 2 Corporate Finance NAME ______________________

Spring 2013 70 pts Show all work MC=5pts each

1. Find the EPS (y-axis) // EBIT (x-axis) crossover point of the following two capital structure plans. Complete the table and Draw the graph and

Apring 2013 2012 70 pts Show all work MC=5pts each

1. Find the EPS (y-axis) // EBIT (x-axis) crossover point of the following two capital structure plans. Complete the table and Draw the graph and show all the points including crossover, where line crosses y-axis, and the three EBITs below 30pts

Assets = $3,000,000 Stock Price = $20 Interest Expense = 12%

PLAN I

D/E = 1.1

Recession Expected Expansion EBIT $500,000 $1,000,000 $1,500,000 Interest Expense __________ _________ __________ Net Income __________ _________ __________

EPS __________ _________ __________

PLAN II

D/E =

3. The optimal capital structure will tend to include more debt for firms with:

A. less taxable income.

B. lower probability of financial distress.

C. substantial tax shields from other sources.

D. the lowest marginal tax rate.

E. the highest depreciation deductions.

4. Your corporation has a Book Value of long-term debt = $2,000,000. The bonds were issued with a original maturity of 20 years and were sold at Par but the issue occurred 10 years ago. Coupon rate = 8% and paid semiannually. The price is 98 (Hint: this is way bonds are priced. 25pts

c. What is the cost of debt?

d. What is the Market Value of the debt?

5. The unlevered cost of capital is:

A. the cost of capital for a firm with no debt in its capital structure.

B. the cost of capital for a firm with no equity in its capital structure.

C. the interest tax shield times pretax net income.

D. equal to the profit margin for a firm with some debt in its capital structure.

E. the cost of preferred stock for a firm with equal parts debt and common stock in its capital structure.

Quiz 2 Corporate Finance NAME ______________________

Spring 2013 70 pts Show all work MC=5pts each

1. Find the EPS (y-axis) // EBIT (x-axis) crossover point of the following two capital structure plans. Complete the table and Draw the graph and

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