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CH17AQZV7

# CH17AQZV7 - Chapter 17 Quiz A Student Name 1 Student ID...

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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? a. M&M Proposition I without taxes b. M&M Proposition I with taxes c. M&M Proposition II without taxes d. static theory ________ 2. The static theory advocates borrowing to the point where: ________ 3. The debt-equity ratio determines the amount of _____ risk that is associated with a firm. ________ 4. Which one of the following is indicative of an optimal capital structure? _______ 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? ________ 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? ________

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

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