Problem Review Set Capital Structure and Leverage

1047 WordsDec 11, 20135 Pages
Managerial Finance – Problem Review Set – Capital Structure and Leverage 1) If a firm utilizes debt financing, an X% decline in earnings before interest and taxes (EBIT) will result in a decline in earnings per share that is larger than X. a. True b. False 2) Firm A has a higher degree of business risk than Firm B. Firm A can offset this by using less financial leverage. Therefore, the variability of both firms ' expected EBITs could actually be identical. a. True b. False 3) It is possible that two firms could have identical financial and operating leverage, yet have different degrees of risk as measured by the…show more content…
2.54% e. 2.66% 11) Michaely Inc. is an all-equity firm with 200,000 shares outstanding. It has $2,000,000 of EBIT, which is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per shares (DPS). Its tax rate is 40%. The company is considering issuing $5,000,000 of 10.0% bonds and using the proceeds to repurchase stock. The risk-free rate is 6.5%, the market risk premium is 5.0%, and the beta is currently 0.90, but the CFO believes beta would rise to 1.10 if the recapitalization occurs. Assuming that the shares can be repurchased at the price that existed prior to the recapitalization, what would the price be following the recapitalization? a. $65.77 b. $69.23 c. $72.69 d. $76.33 e. $80.14 12) The MM model is the same as the Miller model, but with zero corporate taxes. a. True b. False 13) The major contribution of the Miller model is that it demonstrates that a. personal taxes increase the value of using corporate debt. b. personal taxes decrease the value of using corporate debt. c. financial distress and agency costs reduce the value of using corporate debt. d. equity costs increase with financial leverage. e. debt costs increase with financial leverage. 14) Which of the following statements concerning capital structure theory is NOT CORRECT? a.
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