06 EOC6 - Question 1(1 point Your firm has debt worth...

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Question 1 (1 point) Your firm has debt worth $200,000, with a yield of 9 percent, and equity worth $300,000. It is growing at a 4 percent rate, and faces a 40 percent tax rate. A similar firm with no debt has a cost of equity of 12 percent. Under the MM extension with growth, what is the value of your firm's tax shield? Question 2 (1 point) Which of the following statements concerning the asymmetric information theory of capital structure is false? a. If outside funds are required, managers would issue new common stock if they believe their stock is overvalued. b. If outside funds are required, managers would issue debt when they believe their stock is undervalued. c. Investors recognize managers' incentives and hence tend to mark down a firm's stock price when new common stock is issued. d. Firms should maintain a reserve debt capacity, so that they can always issue debt under relatively favorable terms. e. Firms should overleverage, so that they can always issue new common stock under relatively favorable terms.
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