Which of the following is NOT accurate regarding financial leverage?

A) B) Whenever a firm's debt increases faster than its equity, financial leverage increases. Increasing financial leverage will always increase the EPS for stockholders

Investors can undo the effects of the firm's capital structure by using homemade C) leverage. D) Leverage is most beneficial when EBIT is relatively high.

The level of financial leverage that produces the highest firm value is the one most E) beneficial to stockholders.

2 Which of the following correctly completes the following: M&M I with taxes shows
the value of an unlevered firm exceeds the value of a levered firm by the present A) value of the interest tax shield B) C) a levered firm can increase its value by reducing debt the optimal amount of leverage for a firm is not possible to determine

the value of a levered firm is equal to its aftertax EBIT discounted by the unlevered D) cost of capital there is a linear relationship between the amount of debt in a levered firm and its E) value

3 The optimal capital structure is the mixture of debt and equity which:
I. Maximizes the value of the firm. II. Minimizes the firm's weighted average cost of capital. III. Maximizes the market price of the firm's bonds. A) B) C) D) E) III only I only I and III only I and II only I, II and III

4 A firm's systematic risk will ___________ as its debt/equity ratio __________.

A) B) C) D) E)

decrease; increases increase; increases remain unchanged; decreases remain unchanged; increases first increase, and then decrease; increases

5 An investor owns 500 shares of stock in a firm with a debt/equity ratio = 1.0. The investor
prefers an all-equity firm. If the stock price is $2 per share, what should the investor do? A) B) C) D) E) Borrow $500 and buy 250 new shares. Borrow $1,500 and buy 750 new shares. Borrow $2,500 and buy 1,250 new shares. Sell 25 shares and lend $50. Sell 250 shares and lend $500.

6 RDJ Inc. has an asset beta of 0.95. Its current capital structure is 60% debt, 40% equity. What
is the firm's equity beta? Ignore taxes. A) B) C) D) E) 2.375 1.583 1.243 1.875 0.380

7 The Brassy Co. has expected EBIT = $910, an unlevered cost of capital of 12%, and debt with a
face and market value of $2,000 paying an 8.5% annual coupon. If the tax rate is 34%, what is the WACC of Brassy Co.? A) B) 13.25% 11.12% 10.56%

C) D) E) 14.45% 13.64%

8 ABC, Inc. has a debt/equity ratio = 1.2. The firm has a cost of equity of 12% and a cost of debt
of 8%. What will the cost of equity be if the target debt/equity ratio increases to 2.0 and the cost of debt does not change? Ignore taxes. A) B) C) D) E) 11.12% 10.56% 12.64% 13.45% 14.45%

9 An unlevered firm has an EBIT = $250,000, aftertax net income = $165,000, and a cost of
capital of 12%. A levered firm with the same assets and operations has $1.25 million in face value debt paying an 8% annual coupon; the debt sells for par value in the marketplace. What is the value of the levered firm? The tax rate is 34%. A) B) C) D) E) $1,250,000 $1,375,000 $2,200,000 $1,800,000 $2,625,000

10 Suppose a firm issues perpetual debt at par with a face value of $5,000 and a coupon rate of
12%. If the firm is subject to a 40% tax rate and its WACC is 10%, what is the present value of the interest tax shield? A) B) C) D) $1,667 $6,000 $2,000 $2,400

E)

$3,600

The equity risk derived from the firm's capital structure policy is called ____________ risk. A) B) C) D) E) market systematic extrinsic business financial

Which of the following is consistent with the order of claimants according to the absolute priority rule? A) Unpaid wages, unpaid taxes, consumer claims, preferred stockholders

Unpaid taxes, bankruptcy expenses, unsecured creditors, preferred B) stockholders Bankruptcy expenses, unpaid wages, unsecured creditors, preferred C) stockholders Unpaid taxes, unsecured creditors, preferred stockholders, bankruptcy D) expenses Bankruptcy expenses, consumer claims, unsecured creditors, unpaid E) taxes

All else the same, which of the following is true about the interest tax shield of a firm with positive EBIT? The higher the corporate tax rate, the less valuable the interest tax A) shield. If the firm dramatically increases its depreciation expense, it may have B) more of a need for an interest tax shield. The interest tax shield increases as a firm reduces its level of C) outstanding debt. The interest tax shield becomes more valuable as the size of the debt D) load increases. Since the interest tax shield is valuable, the firm would rather pay a high E) coupon rate on its bonds than a low coupon rate.

The cost of debt is generally lower than the cost of equity; however, according to ____________, replacing equity with debt will not change the value of the firm because the savings attributable to the lower cost of debt financing will be offset by the higher required return on the remaining equity. A) B) C) D) E) M&M Proposition I without taxes M&M Proposition I with taxes the static theory of capital structure M&M Proposition II without taxes M&M Proposition II with taxes

According to _____________ , a firm's cost of equity increases with greater debt financing, and the WACC decreases. A) B) C) D) E) M&M Proposition I with taxes M&M Proposition I without taxes the static theory of capital structure M&M Proposition II with taxes M&M Proposition II without taxes

The Brassy Co. has expected EBIT of $910, debt with a face and market value of $2,000 paying an 8.5% annual coupon, and an unlevered cost of capital of 12%. If the tax rate is 34%, what is the value of the firm? A) B) C) D) E) $3,258 $3,685 $5,685 $6,325 $7,005

What is the cost of equity for a firm where the required return on assets is 14%, the cost of debt is 11%, and the target debt/equity ratio is 0.5? Ignore taxes. 14.0%

A) B) C) D) E) 12.5% 11.0% 16.0% 15.5%

The Wrangler Co. has expected EBIT = $9,250, and debt with a face and market value of $14,000 paying a 9% annual coupon. The market value of the firm is $58,525. If the tax rate is 34%, what is Wranger's unlevered cost of capital? A) B) C) D) E) 9.00% 11.35% 12.12% 12.76% 12.99%

Given the following, what is the WACC? EBIT = $2 million; tax rate = 34%; market value and book value of debt = $4 million; unlevered cost of capital = 14%; cost of debt = 9%. A) B) C) D) E) 11.4% 14.0% 13.1% 12.6% 12.0%

10

An unlevered firm with a market value of $1 million has 50,000 shares outstanding. The firm restructures itself by issuing 200 new par bonds with face value $1,000 and an 8% coupon. The firm uses the proceeds to repurchase outstanding stock. In considering the newly levered versus formerly unlevered firm, what is the breakeven EBIT? Ignore taxes. A) $50,000 $25,000

B) C) D) E) $95,000 $80,000 $75,000

All else the same, which of the following is NOT an accurate statement about stock splits and stock dividends? (All of the statements refer to book, and not market, values.) A) Earnings per share will likely decrease only with the stock dividend.

Total owners' equity will not change with either a stock split or a stock B) dividend. The primary effect of either is to increase the number of shares C) outstanding. D) E) Under TSE rules, the maximum amount of a stock dividend is 25% Accounting treatment is different for stock dividends and stock splits.

Which of the following is NOT accurate regarding corporate dividends? A) B) Once declared, a dividend becomes a liability of the firm. Dividend stability is usually viewed as a desirable objective.

The existence of an information content effect tends to make it difficult to C) determine the effects of dividend policy. In the absence of a more favorable tax rate on cash dividends, investors D) will prefer stocks with relatively low dividend payout rates. E) The price of a share of stock will tend to rise on the ex-dividend day.

Which of the following cannot be used to enhance dividend stability? A) B) C) D) E) Share repurchases The implementation of a residual dividend policy. Payment of an extra dividend. Payment of a special dividend Establishment of a target dividend payout ratio

Which of the following is NOT an appropriate way for a firm to deal with excess cash? A) B) C) D) E) positive NPV project. regular cash dividend stock dividend stock repurchase special dividend

BDJ, Inc. has 31,000 shares of stock outstanding with a market price of $15 per share. If net income for the year is $155,000 and the dividend per share is $2.00, what is the payout ratio for BDJ, Inc.? A) B) C) D) E) 40.0% 21.6% 78.4% 60.0% 83.2%

The board of directors of DDT Inc. has declared a dividend of $0.75 per share payable on Monday, January 28 to shareholders of record as of Monday, January 14. Under TSE rules, if you bought 500 shares of DDT stock on Friday, January 11 for $7.50 per share, how much will you receive in dividends? A) B) C) D) E) $375.00 $37.50 $1.50 $55.00 $0.00

DRK, Inc. currently has 400,000 shares of stock outstanding, with a market price of $20. The firm would prefer to have its stock trade at a value between $30 and $35 per share. Of the following choices, which would allow the firm to achieve its objective? A 2-for-1 stock split

A) B) C) D) E) A 50% stock dividend A 2-for-3 reverse stock split A 1-for-2 reverse stock split A $2 per share cash dividend

You own stock in a firm that has 1.25 million shares outstanding. The current stock price is $13.50 per share. If the company issues a 10% stock dividend, what would you expect the stock price to be after the dividend is paid? A) B) C) D) E) $12.82 $12.27 $13.49 $13.30 $13.71

The desirability of owning a high-dividend payout stock would increase if: A) B) C) A tax exemption on the first $100 of dividend income was created. A reduced tax rate on capital gains income was created. A tax exemption on the first $100 of capital gains income was created.

The brokerage commissions on purchases and sales of shares were D) reduced. E) The number of positive NPV projects available to the firm increased.

10

The market's reaction to the announcement of a change in the firm's dividend payout is the: A) B) C) M&M Proposition I. Clientele effect. Efficient Markets Hypothesis. Information content effect.

D) E) M&M Proposition II.

1 Which of the following is a possible motivation for a reverse stock split?

A) B) C) D) E) To decrease the stock price and, thereby, increase the stock's marketability. To fall below the minimum listing requirements of a stock exchange. To attract tax-exempt investors. To force out minority shareholders. To increase the transaction costs of shareholders.

2 Which of the following investors would likely prefer a firm with a high dividend payout rate?
I. A corporate investor II. A tax-exempt investor III. An investor who does not need current income IV. An investor in a relatively high personal income tax bracket A) B) C) D) E) III only II and IV only I and II only III and IV only I, II, III and IV

3 If a firm has excess cash and management believes the firm's shares are currently undervalued
by market participants, the firm is a likely candidate for a __________. A) B) C) D) E) liquidating dividend stock repurchase regular cash dividend stock dividend stock split

4 BDJ, Inc. has 31,000 shares of stock outstanding with a market price of $15 per share. If net

income for the year is $155,000 and the payout ratio is 20%, what is the dividend per share on BDJ Inc.'s stock? A) B) C) D) E) $1.00 $0.68 $1.55 $1.25 $1.89

5 You own stock in a firm that has 1.25 million shares outstanding. The current stock price is
$13.50 per share. If the company does a 3-for-1 stock split, what would you expect the stock price to be after the split? A) B) C) D) E) $40.50 $13.50 $4.50 $4.33 $3.67

6 Put the following dates in chronological order:

I. declaration date II. payment date III. ex-dividend date IV. record date. A) B) C) D) E) I, II, III, IV. IV, III, II, I. I, II, IV, III.. II, I, IV, III. I, III, IV, II.

7 In theory, in a world without taxes, how should the price of a stock change in response to a
cash dividend? Decrease by exactly the amount of the dividend.

A) B) C) D) E) Increase by exactly the amount of the dividend Increase by less than the amount of the dividend Decrease by less than the amount of the dividend. The price should remain unchanged.

8 According to research, how does the price of a stock change in response to a cash dividend?
A) B) C) D) E) Decrease by exactly the amount of the dividend. Increase by exactly the amount of the dividend Increase by less than the amount of the dividend Decrease by less than the amount of the dividend. The price should remain unchanged.

9 On which of the following dates should the price of a share of stock adjust to reflect the impact
of the dividend? A) B) C) D) E) Announcement date. Record date Ex date Effective date Payment date.

10 In a world without taxes, ________ matter(s) but ______ should be irrelevant.

A) B) C) D) dividends / the ex-date. dividend policy / dividends stock dividends / cash dividends the ex-date / dividends.

E)

dividends / dividend policy.