09 May WHAT IS THE PRESENT VALUE OF THE TAX SHIELD?
(13) Working capital includes all of the following items except:Notes payables.Inventory.Retained earnings.Account payables.(14)Which of the following statements about Capital Asset Pricing Model (CAPM) equation “E(RA) = Rf BA(E(RM) – Rf) ” is true ______E(RA) is the required rate of return for stock A.Rf is the real risk-free rate.E(RM) is the required rate of return on the individual security.BA is the beta coefficient for the market portfolio.(16)A firm’s optimal capital structure ______is generally a mix of 40% debt and 60% equity.exists when the debt-equity ratio is 0.5.is the debt-equity ratio that exists at the point where the firm’s weighted after-tax cost of debt is minimized.is the debt-equity ratio that results in the lowest possible weighted average cost of capital and the largest firm value(18)Business risk is defined as the:______equity risk that comes from the nature of a firm’s operating activities.equity risk associated with the capital structure of a firm.probability that a firm will file bankruptcy.situation in which a firm causes its creditors to suffer a financial loss.(21)Announcements and news contain both an expected component and a surprise component. It is the surprise component that affects a stock’s price and therefore its return____TrueFalse(23)We want to choose the optimal capital structure for a firm that will maximize the stockholder wealth _______TrueFalse(25)A company can buy back its own shares of stock (stock repurchase) on the open market and the company can also make a tender offer to buy back its shares. _______TrueFalse(26)Which one of the following is the prime objective of a residual dividend policy? _______Maintaining a stable dividendIncreasing the dividend at a steady paceMeeting the firm’s investment needsMaintaining a stable dividend payout ratio(30)In a Chapter 7 bankruptcy which one of the following will have the lowest priority when a bankrupt firm’s assets are distributed if the absolute priority rule is followed?preferred stockholderssecured creditorsunsecured creditorscommon shareholders(36)Suppose we have a bond issue currently outstanding that has 25 years left to maturity. The coupon rate is 9% and coupons are paid annually. The bond is currently selling for $968.72 per $1 000 bond. What is the before-tax cost of debt (YTM)?5.00%9.33 .0%9.00%(37)Based on the information from Question 36 if the firm’s marginal tax rate is 20%. What’s the firm’s after-tax cost of debt?________3.58%5.08%6.32%7.46%(39)If a firm’s before-tax cost of common equity is 6.5% and the firm has a 20% marginal tax rate what is the firm’s after-tax cost of preferred stock?6.5%5.2 .0%None of above is correct.(43) A firm has a $10 million bond outstanding with a coupon rate of 6%. The tax rate is 35%. What is the present value of the tax shield?______$3.5 million0.18 million$10 million$13.5 million
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