7. What is the unlevered value of Montana Hill? A. $48,600B. $50,000C. $52,680D. $56,667E. $60,600 8. How much is the present value of the tax shield from debt? 9. What is the levered value of Montana Hill? 10. What is the D/E ratio of Montana Hill? 11. What is the levered cost of equity of Montana Hill. A. 8%B. 11% C. 11.58% D. 11.89% E. 12.56%
5 12. The TrunkLine Company debtholders are promised payments of $35 if the firmdoes well, but will receive only $20 if the firm does poorly. Bondholders arewilling to pay $25. The promised return to the bondholders is approximately: 13. The MM theory with taxes implies that firms should issue maximum debt. Inpractice, this is not true because: 14. If a firm issues debt but writes protective and restrictive covenants into the loancontract, then the firm's debt may be issued at a _____ interest rate comparedwith otherwise similar debt. 15. One of the indirect costs of bankruptcy is the incentive for managers to takelarge risks. When following this strategy: A. the firm will rank all projects and take the project which results in thehighest expected value of the firm.B. bondholders expropriate value from stockholders by selecting high riskprojects.C. stockholders expropriate value from bondholders by selecting high riskprojects.D. the firm will always take the low risk project.E. Both A and B.16. Golden Island Inc. will earn $40 in the coming one year if it does well. Thedebtholders are promised with payments of $31.25 in one year if the firm doeswell. If the firm does poorly, expected earnings in one year will be $18.5 andthe repayment will be $12.5 because of the $6 dead weight cost of bankruptcy.The probability of the firm performing poorly or well is 60% and 40%respectively. If bondholders are fully aware of these costs what will they pay for the debt? The interest rate on the bonds is 8%.
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- Fall '15