Sample_Quiz_2_Fall_2010_FIN_351[1]

Sample_Quiz_2_Fall_2010_FIN_351[1] - Sample Quiz 2 Fall...

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Sample Quiz 2 Fall 2010 FIN 351 Student: ___________________________________________________________________________ 1. A firm issues 100,000 equity shares with a total market value of $5,000,000. The firm's market value of debt is also of equal amount, i.e. $5,000,000. The firm is expected to generate $1.5 million in operating income and pay $250,000 in interest. Ignoring taxes, this will generate $12.50 earnings per share. What will happen to EPS if the firm's borrowing and interest expense increases by 50% and the number of shares in circulation is cut by 50% (assuming that the share price remains unchanged with this change in capital structure)? A. EPS decrease to $10.00. B. EPS decrease to $11.67. C. EPS increase to $15.00. D. EPS increase to $22.50. 2. What is the proportion of debt financing for a firm that expects a 24% return on equity, a 16% return on assets, and a 12% return on debt? Ignore taxes. A. 54.0% B. 60.0% C. 66.7% D. 75.0% 3. Global Auto has sold 20 cars at the price of $20,000 per car. The variable cost is $15,000 per car. The interest expense is $10,000 and fixed costs are $25,000. The tax rate is 30%. What is the Degree of operating leverage of the company? A. 1.11 B. 1.15 C. 1.33 D. 1.54 4. According to MM II, as a firm's debt-to-equity ratio decreases: A. its financial risk increases. B. its operating risk increases. C. the required rate of return on equity increases. D. the required rate of return on equity decreases. 5. A firm’s degree of total leverage is 2. What does this mean? A. A 1% increase in units sold results in a 2% increase in net income. B. A 1% increase in units sold results in a 2% increase in operating income. C. A 1% increase in operating income results in a 2% increase in net income. D. A 1% increase in fixed costs results in a 2% increase in net income. 6. A firm all equity financed is valued at $1 million. The firm then issues $1 million in permanent debt at a 10% interest rate, and a 35% tax rate. What is the value of the firm if MM I is modified to recognize corporate taxes? A. $1,135,000. B. $1,100,000. C. $1,350,000. D. $1,700,000.
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7. The present value of the costs of financial distress increases with increases in the debt ratio because the: A. expected return on assets increases. B. present value of the interest tax shield is greater. C. equity tax shield is depleted. D. probability of default and/or bankruptcy is greater. 8. A firm that has a debt/equity ratio of 50/50 is valued at $1 million. The firm changes its capital structure to 70/30. The debt interest rate is 10% and the tax rate is 35%. According to MM I what is the value of the firm after the change in capital structure? A. $1,300,000 B. $1,500,000 C. $1,000,000 D. $800,000 9. Leverage will __________ shareholders' expected return and _________ their risk. A. increase; decrease
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Sample_Quiz_2_Fall_2010_FIN_351[1] - Sample Quiz 2 Fall...

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