A) 2.18%
B) 2.29%
C) 2.41%
D) 2.54%
E) 2.66%
G) A) and D)
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A) If corporate tax rates were decreased while other things were held constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital structure were correct, this would tend to cause
Corporations to decrease their use of debt.
B) A change in the personal tax rate should not affect firms' capital
Structure decisions.
C) "Business risk" is differentiated from "financial risk" by the fact that financial risk reflects only the use of debt, while business risk reflects both the use of debt and such factors as sales
Variability, cost variability, and operating leverage.
D) The optimal capital structure is the one that simultaneously (1) maximizes the price of the firm's stock, (2) minimizes its WACC,
And (3) maximizes its EPS.
E) If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.
G) A) and B)
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A) Increasing financial leverage is one way to increase a firm's basic earning power (BEP) .
B) If a firm lowered its fixed costs while increasing its variable costs, holding total costs at the present level of sales constant,
This would decrease its operating leverage.
C) The debt ratio that maximizes EPS generally exceeds the debt ratio
That maximizes share price.
D) If a company were to issue debt and use the money to repurchase common stock, this action would have no impact on its basic earning power ratio. (Assume that the repurchase has no impact on the
Company's operating income.)
E) If changes in the bankruptcy code made bankruptcy less costly to corporations, this would likely reduce the average corporation's debt ratio.
G) A) and C)
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A) $600,000
B) $466,667
C) $333,333
D) $200,000
E) None of the above
G) C) and E)
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A) Company HD has a higher return on assets (ROA) than Company LD.
B) Company HD has a higher times interest earned (TIE) ratio than
Company LD.
C) Company HD has a higher return on equity (ROE) than Company LD, and its risk, as measured by the standard deviation of ROE, is also
Higher than LD's.
D) The two companies have the same ROE.
E) Company HD's ROE would be higher if it had no debt.
G) A) and E)
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A) Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC.
B) Since debt financing is cheaper than equity financing, raising a
Company's debt ratio will always reduce its WACC.
C) Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing. However, this
Action still may raise the company's WACC.
D) Increasing a company's debt ratio will typically increase the marginal cost of both debt and equity financing. However, this
Action still may lower the company's WACC.
E) Since a firm's beta coefficient it not affected by its use of financial leverage, leverage does not affect the cost of equity.
G) B) and C)
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A) Company HD has a higher net income than Company LD.
B) Company HD has a lower ROA than Company LD.
C) Company HD has a lower ROE than Company LD.
D) The two companies have the same ROA.
E) The two companies have the same ROE.
G) None of the above
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A) normally lead to an increase in its fixed assets turnover ratio.
B) normally lead to a decrease in its business risk.
C) normally lead to a decrease in the standard deviation of its
Expected EBIT.
D) normally lead to a decrease in the variability of its expected EPS.
E) normally lead to a reduction in its fixed assets turnover ratio.
G) All of the above
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A) $40
B) $48
C) $52
D) $54
E) $60
G) C) and E)
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B) False
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A) As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS.
B) The optimal capital structure simultaneously maximizes EPS and
Minimizes the WACC.
C) The optimal capital structure minimizes the cost of equity, which
Is a necessary condition for maximizing the stock price.
D) The optimal capital structure simultaneously minimizes the cost of
Debt, the cost of equity, and the WACC.
E) The optimal capital structure simultaneously maximizes stock price
And minimizes the WACC.
G) B) and C)
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B) False
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A) A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, its
Cost is generally lower than the after-tax cost of debt.
B) The capital structure that minimizes a firm's weighted average cost of capital is also the capital structure that maximizes its stock
Price.
C) The capital structure that minimizes the firm's weighted average cost of capital is also the capital structure that maximizes its
Earnings per share.
D) If a firm finds that the cost of debt is less than the cost of
Equity, increasing its debt ratio must reduce its WACC.
E) Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted tradeoff theory would suggest
That firms should increase their use of debt.
G) A) and E)
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A) $58
B) $59
C) $60
D) $61
E) $62
G) A) and C)
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A) $45.90
B) $48.12
C) $51.06
D) $53.33
E) $58.75
G) C) and E)
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A) Business risk.
B) Total risk.
C) Financial risk.
D) Market risk.
E) The firm's beta.
G) A) and E)
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A) Generally, debt-to-total-assets ratios do not vary much among different industries, although they do vary among firms within a
Given industry.
B) Electric utilities generally have very high common equity ratios because their revenues are more volatile than those of firms in
Most other industries.
C) Drug companies (prescription, not illegal!) generally have high debt-to-equity ratios because their earnings are very stable and, thus, they can cover the high interest costs associated with high
Debt levels.
D) Wide variations in capital structures exist both between industries and among individual firms within given industries. These differences are caused by differing business risks and also
Managerial attitudes.
E) Since most stocks sell at or very close to their book values, book value capital structures are almost always adequate for use in
Estimating firms' costs of capital.
G) B) and E)
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A) $49.43
B) $50.70
C) $52.00
D) $53.33
E) $56.00
(The following data apply to Problems 66, 67, and 68. The problems MUST be kept together, and they cannot be changed algorithmically.)
Barnes Baskets, Inc. (BB) currently has zero debt. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. BB's current cost of equity is 13%, and its tax rate is 40%. The firm has 20,000 shares of common stock outstanding selling at a price per share of $23.08.
G) C) and D)
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B) False
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A) The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company's earnings per share (EPS) .
B) The optimal capital structure is the mix of debt, equity, and
Preferred stock that maximizes the company's stock price.
C) The optimal capital structure is the mix of debt, equity, and
Preferred stock that minimizes the company's cost of equity.
D) The optimal capital structure is the mix of debt, equity, and
Preferred stock that minimizes the company's cost of debt.
E) The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company's cost of preferred stock.
G) A) and C)
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