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Question
The market value of a levered firm can be represented by the following equation:Market value of levered firm = Market value of unlevered firm ____ Present value of tax shield ____ Present value of financial distress costs ____ Present value of agency costs
a. minus; plus; plus
b. plus; plus; plus
c. plus; minus; minus
d. minus, minus, plus
Answer
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Related questions
Q:
Sadaplast has just declared a 25 percent stock dividend. The annual dividend, before the stock dividend was declared, was $1.00. Sadaplast intends to pay a dividend of $1.05 per share after the stock dividend is paid. What is the percentage increase in the cash dividend that will accompany the stock dividend?
a. 6.25%
b. 26.25%
c. 31.25%
d. 5.00%
Q:
Metromat has the following equity accounts on its balance sheet:Common stock ($2 par, 2.4 million shares)$ 4,800,000Contributed capital in excess of par33,600,000Retained earnings134,400,000Total common stockholders' equity$172,800,000The current market price of Metromat's shares is $16. If the firm declares a 15% stock dividend and a $0.15 per share cash dividend, what will be the impact on contributed capital in excess of par? Assume a marginal tax rate of 40%.a. decreases $2.56 millionb. increases $5.04 millionc. increases $5.76 milliond. does not change
Q:
If Sulzer has 10 million shares outstanding, operating income (EBIT) of $42.4 million, and interest expenses of $6.8 million, what is Sulzer's dividend payout ratio, given that the dividend per share is $0.80? Assume a marginal tax rate of 40%.
a. 56.3%
b. 31.5%
c. 50.4%
d. 37.5%
Q:
Zimmer Corp. has just declared a 5 for 4 stock split. If the pre-split price of common stock was $36 a share, what will be the post-split price per share (assuming no other changes occur)?
a. $30.00
b. $27,00
c. $28.80
d. $32.00
Q:
Zycad has operating earnings (EBIT) of $8.6 million and annual interest expenses are $1.5 million. Zycad wishes to maintain its annual dividend of $1.00 per share on the 1,900,000 shares outstanding. The firm has a bond issue outstanding that requires the retirement of $3 million (face value) of the issue each year through purchases of the bonds in the market. What is the maximum dividend per share that may be paid if the current market price of the bonds is $85? Assume the marginal tax rate is 40% and that earnings are the only source of funds that can be used to pay the dividend and retire the bonds.
a. $0.66
b. $0.16
c. $1.37
d. $0.90
Q:
Kaneb Services, Inc. has just declared a 3 for 2 stock split. The company's pre-split common stockholders' equity was as follows:Common stock($1.25 par, 2,000,000 shares)$ 2,500,000Contributed capital in excess of par$ 17,500,000Retained earnings182,100,000Total common stockholders' equity$202,100,000If the pre-split price of common stock was $42, what will be the amount of retained earnings after the split?a. $140,100,000b. $139,200,000c. $182,100,000d. $141,350,000
Q:
Peterson Company expects earnings per share and dividends per share to be $4.50 and $2.50 respectively next year. Peterson currently has 5,000,000 shares of common stock outstanding. The company's capital budget for next year is projected to be $25,000,000. Peterson plans to maintain its present debt ratio (debt to total assets) at 40% next year. (Assume that Peterson's capital structure includes only common equity and debt and that these will be the only sources of funds to finance capital budgeting projects next year.) Determine how much external equity the company must raise to finance its capital budget.
a. $15,000,000
b. 0
c. $5,000,000
d. $7,500,000
Q:
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a. $4.32
b. $2.88
c. $2.20
d. cannot be computed with the information provided
Q:
WPI Inc. has the following current equity accounts on its balance sheet:Common stock ($2.50 par, 500,000 shares)$ 1,250,000Contributed capital in excess of par$10,000,000Retained earnings$15,540,000Total$26,790,000If WPI earned $3.20 per share this year, what is the maximum dividend per share that WPI may pay if the state capital impairment provisions are limited to the par value and the contributed capital in excess of par accounts?a. $3.20b. $31.08c. $34.28d. $32.17
Q:
The Altern Music Co. earns $4.25 per share, has 70,000 shares outstanding, and a capital budget of $200,000. If Altern Music raises all of its funds internally and follows the "passive residual policy," what are its annual dividends per share?
a. $1.70
b. $1.39
c. $2.55
d. $0.94
Q:
Last year, Toluca Engineering paid a $0.25 dividend per share each quarter. If Toluca announces both a 5 percent stock dividend and an increase in the quarterly dividend to $0.27, what is the effective rate of the dividend increase?
a. 13.0%
b. 8.0%
c. 11.2%
d. 13.4%
Q:
The theoretical post-stock dividend price is equal to the pre-stock dividend price ____.
a. multiplied by 1 minus the percentage stock dividend rate
b. multiplied by 1 plus the percentage stock dividend rate
c. divided by 1 minus the percentage stock dividend rate
d. divided by 1 plus the percentage stock dividend rate
Q:
Under dividend reinvestment plans, shareholders can automatically
a. reduce their taxable income
b. increase their cash inflows
c. use dividends to purchase additional shares
d. increase their taxable income
Q:
A stock dividend will notaffect which of the following balance sheet items.
a. total assets
b. retained earnings
c. contributed capital in excess of par
d. common stock at par
Q:
In order for a stock to qualify for inclusion on the "legal lists," a firm must
a. register with the Securities Exchange Commission (SEC)
b. have assets in excess of $500,000
c. have 10 continuous profitable quarters
d. have a record of continuous and stable dividends
Q:
Most states limit dividend policy by requiring
a. that dividends may not be paid unless the firm generates net earnings during the most recent year
b. that dividends may only be paid out of retained earnings
c. that dividends may not be paid when the firm is insolvent
d. that dividends may be paid when the firm is insolvent
Q:
The dividend "clientele effect" concept was originally developed by
a. Myron Gordon
b. Merton Miller and Franco Modigliani
c. Milton Friedman
d. Paul Samuelson
Q:
Explain the pecking order theory.
Q:
Crown Data(CD) has a current capital structure that consists of $120 million in common equity (15 million shares) and $80 million in long-term debt with an average interest rate of 11 percent. CD is considering an expansion project that will cost $22 million. The project will be financed either by issuing long-term debt at a cost of 12.5 percent, or the sale of new common stock at $35 per share. The firm's marginal tax rate is 40%. What is the EBIT indifference point between the two financing options?a. $71.5 millionb. $77.2 millionc. $68.3 milliond. $ 1.0 million
Q:
Sulzar's capital structure consists only of common stock (20 million shares), but the firm is planning a major expansion which will require $100 million of new capital. Sulzar has a choice of obtaining the needed capital through the sale of 5 million shares of common stock at $20 per share or the sale of $100 million of first mortgage bonds that would have a coupon rate of 9%. If Sulzar has a marginal tax rate of 40%, calculate the EBIT-EPS indifference point.
a. $45 million
b. $36 million
c. $5 million
d. $9 million
Q:
The Albany Corporation has a present capital structure consisting of common stock ($200 million, 10 million shares) and debt ($150 million, 8%). The company is planning a major expansion and is undecided between two financing plans. Plan A:
Equity financing. Under this plan, an additional 2.5 million shares of common stock will be sold at $15 each. Plan B:
Debt financing. Under this plan, $37.5 million of 10% long-term debt will be sold. What happens to the EBIT indifference point if the interest rate on the new debt decreases and the common stock price remains constant?
a. the indifference point increases
b. the indifference point decreases
c. the indifference point does not change
d. cannot be determined
Q:
What is the present value of the tax shield to a firm that has total assets of $80 million and a net worth of $55 million, if the average interest rate on perpetual debt is 8.5%, the average return on equity is 14%, and the marginal tax rate is 35%?
a. $8.75 million
b. $12.25 million
c. $0.85 million
d. $0.744 million
Q:
The optimal capital structure is a function of ____.
a. corporate income taxes
b. financial distress costs
c. agency costs
d. All of these are correct.
Q:
Due to both financial distress and agency costs, a firm should have a capital structure that
a. contains all debt
b. contains all equity
c. contains both debt and equity
d. contains only long-term debt
Q:
As more debt is added to the capital structure of a firm, the cost of debt capital
a. initially rises slowly, then falls beyond some point
b. increases at a steady rate throughout the entire range
c. beyond some point, becomes greater than the cost of equity
d. initially rises slowly, then increases rapidly beyond some point
Q:
Perfect capital markets imply the following:
a. there are no transactions costs for buying and selling securities
b. relevant information is readily available for individuals and is costless to obtain
c. all investors can borrow and lend at the same rate
d. All of these answers are correct.
Q:
Two prominent finance researchers (Modigliani and Miller) showed that
a. the firm's optimal capital structure consists of approximately equal proportions of debt and equity
b. the value of the firm is independent of its capital structure in perfect capital markets with no income taxes
c. the firm's cost of capital is minimized when its capital structure consists of approximately equal proportions of debt and equity
d. the value of the firm is independent of its capital structure in perfect capital markets with income taxes
Q:
Chirping Charlie Canary Farms has fixed operating costs of $10,000. It is trying to determine its breakeven point in dollars for its special bird seed. The sale price for each bag of bird seed is $25 and its variable cost per bag is $15. The firm's operating breakeven point in dollars is:
a. $10,000
b. $16,667
c. $6,250
d. $25,000
Q:
Borkstran has sales of $7.8 million, a variable cost ratio of 0.6, EBIT of $1.1 million, and a degree of combined leverage of 3.4. What is Borkstran's degree of financial leverage?
a. 1.20
b. 0.73
c. 2.29
d. 0.84
Q:
Kenzel has an EPS of $4.20 and sales are $9 million. If the firm has a degree of operating leverage of 4.0 and a degree of financial leverage of 5.2, forecast EPS if the firm expects a 4% sales decline.
a. $0.71
b. $3.49
c. $4.03
d. $3.33