CH17AQZV7 - Chapter 17 Quiz A Student Name _ _ 1. Student...

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Chapter 17 Quiz A Student Name _________________________ Student ID ____________ ________ 1. Which one of the following supports the statement that the cost of equity rises when leverage is increased? d. static theory ________ 2. The static theory advocates borrowing to the point where: a. the pre-tax cost of debt is equal to the cost of equity. b. the cost of equity is equal to the interest tax shield. c. the tax benefit from debt is equal to the cost of the increased probability of financial distress. d. the interest tax shield is maximized. ________ 3. The debt-equity ratio determines the amount of _____ risk that is associated with a firm. a. business b. systematic c. financial d. unsystematic ________ 4. Which one of the following is indicative of an optimal capital structure? a. maximum tax shield b. minimum debt-equity ratio c. maximum cost of capital d. maximum firm value _______ 5. If an individual stockholder wants to offset the leverage position of an issuing firm, he or she should: a. increase their holdings in that stock by borrowing money. b. increase their holdings in that stock by reducing their cash reserves. c. reduce their holdings in that stock and borrow money. d. reduce their holdings in that stock and lend out money. ________ 6. Your firm has 10,000 bonds outstanding with a face value of $1,000 each. These bonds have an 8 percent coupon and pay interest semiannually. The current market quote on these bonds is 98. What is the amount of the annual interest tax shield on these bonds if the tax rate is 34 percent? a. $272,000 b. $314,815 c. $528,000 d. $800,000 ________ 7. Big Bill’s Yachts has a debt-equity ratio of .75. The pre-tax cost of debt is 8 percent and the unlevered cost of capital is 13 percent. What is the cost of equity if the tax rate is 35 percent? a. 13.00 percent b. 15.44 percent c. 16.37 percent d. 17.33 percent ________ 8. Sally’s has debt of $12,000 and equity of $18,000. The cost of debt is 8 percent and the cost of equity is 13 percent. The leveraged value of the firm is $10,600 and the tax rate is 34 percent. What is the firm’s weighted average cost of capital? a. 9.91 percent b. 10.03 percent c. 10.26 percent d. 11.00 percent ________ 9. You are considering two different capital structures. The first is all equity. The second is a combination of debt and equity. The all equity option would consist of 15,000 shares of stock. The debt-equity option would
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This note was uploaded on 05/29/2010 for the course FIN 325 taught by Professor Staff during the Spring '08 term at San Diego State.

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CH17AQZV7 - Chapter 17 Quiz A Student Name _ _ 1. Student...

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