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Week11_TutorialAnswers - SCHOOL OF BANKING AND FINANCE...

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FINS 1613 Tutorial Answers 1 SCHOOL OF BANKING AND FINANCE FINS1613 BUSINESS FINANCE Semester 2, 2008 TUTORIAL ANSWERS WEEK 11 – Capital Structure: Theory and Evidence Multiple-choice Questions 1. The corporate tax rate is 37%. The MaPol Company has a 100 million dollars debenture issue outstanding with a coupon rate of 6.84% per annum. Face value of one debenture is $10 000 and investors require a 7% return on debentures with similar credit rating. What is the present value of the tax shield? a. $6 840 000 b. $25 300 800 c. $37 000 000 d. $30 160 000 e. $7 000 000 Answer is c. PV tax shield = D*Tc = $100M x 0.37 = $37M 2. Less Debt, Inc., just revised its capital structure such that the firm’s debt-equity ratio decreased from .80 to .40. Those individual investors who prefer the old capital structure: Answer is d. Firm is unelevering so to apply homemade leverage, the investor would lever up by borrowing in the same proportion.
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FINS 1613 Tutorial Answers 2 3. Which of the following statements about capital structure theory is most correct?
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