Question 1

Senbet Ventures is considering starting a new company to produce stereos. The sales price would be set at 1.5 times the variable cost per unit; the VC/unit is estimated to be $2.50; and fixed costs are estimated at $120,000. What sales volume would be required in order to break even, i.e., to have an EBIT of zero for the stereo business?

Accepted Answer

A)   86,640
B)   91,200
C)   96,000
D)   100,800
E)   105,840F) C) and D)
G) A) and B)

Question 2

Ang Enterprises has a levered beta of 1.10, its capital structure consists of 40% debt and 60% equity, and its tax rate is 40%. What would Ang's beta be if it used no debt, i.e., what is its unlevered beta?

Accepted Answer

A)   0.64
B)   0.67
C)   0.71
D)   0.75
E)   0.79F) All of the above
G) None of the above

Question 3

Vafeas Inc.'s capital structure consists of 80% debt and 20% common equity, its beta is 1.60, and its tax rate is 35%. However, the CFO thinks the company has too much debt, and he is considering moving to a capital structure with 40% debt and 60% equity. The risk-free rate is 5.0% and the market risk premium is 6.0%. By how much would the capital structure shift change the firm's cost of equity?

Accepted Answer

A)   -5.20%
B)   -5.78%
C)   -6.36%
D)   -6.99%
E)   -7.69%F) None of the above
G) A) and D)

Question 4

The firm's target capital structure should be consistent with which of the following statements?

Accepted Answer

A)   Maximize the earnings per share (EPS) .
B)   Minimize the cost of debt (rd) .
C)   Obtain the highest possible bond rating.
D)   Minimize the cost of equity (rs) .
E)   Minimize the weighted average cost of capital (WAC
C)  .F) B) and C)
G) All of the above

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)   The capital structure that maximizes expected EPS also maximizesThe price per share of common stock.
B)   The capital structure that minimizes the interest rate on debt alsoMaximizes the expected EPS.
C)   The capital structure that minimizes the required return on equityAlso maximizes the stock price.
D)   The capital structure that minimizes the WACC also maximizes thePrice per share of common stock.
E)   The capital structure that gives the firm the best credit rating also maximizes the stock price.F) A) and B)
G) A) and C)

Question 6

Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk.

Accepted Answer

A) True 
 B)False

Question 7

(The following data apply to Problems 60, 61, and 62. The problems MUST be kept together, and they cannot be changed algorithmically.) 
Powell Plastics, Inc. (PP)  currently has zero debt. Its earnings before interest and taxes (EBIT)  are $80,000, and it is a zero growth company. PP's current cost of equity is 10%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00.
-PP is considering moving to a capital structure that is comprised of 30% debt and 70% equity, based on market values. The debt would have an interest rate of 8%. The new funds would be used to repurchase stock. It is estimated that the increase in risk resulting from the added leverage would cause the required rate of return on equity to rise to 12%. If this plan were carried out, what would be PP's new value of operations?

Accepted Answer

A)   $484,359
B)   $487,805
C)   $521,173
D)   $560,748
E)   $584,653F) A) and D)
G) A) and E)

Question 8

Now assume that AJC is considering changing from its original capital structure to a new capital structure that results in a stock price of $64 per share. The resulting capital structure would have a $336,000 total market value of equity and a $504,000 market value of debt. How many shares would AJC repurchase in the recapitalization?

Accepted Answer

A)   4,250
B)   4,500
C)   4,750
D)   5,000
E)   5,250F) B) and D)
G) A) and E)

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   A firm's business risk is determined solely by the financial characteristics of its industry.
B)   The factors that affect a firm's business risk are affected by industry characteristics and economic conditions. Unfortunately, these factors are generally beyond the control of the firm'sManagement.
C)   One of the benefits to a firm of being at or near its targetCapital structure is that this eliminates any risk of bankruptcy.
D)   A firm's financial risk can be minimized by diversification.
E)   The amount of debt in its capital structure can under noCircumstances affect a company's business risk.F) A) and B)
G) D) and E)

Question 10

A group of venture investors is considering putting money into Lemma Books, which wants to produce a new reader for electronic books. The variable cost per unit is estimated at $250, the sales price would be set at twice the VC/unit, fixed costs are estimated at $750,000, and the investors will put up the funds if the project is likely to have an operating income of $500,000 or more. What sales volume would be required in order to meet this profit goal?

Accepted Answer

A)   4,513
B)   4,750
C)   5,000
D)   5,250
E)   5,513F) All of the above
G) A) and C)

Exam 15: Capital Structure Decisions

Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk.

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

Correct Answer
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The firm's target capital structure should be consistent with which of the following statements?

Correct Answer
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Ang Enterprises has a levered beta of 1.10, its capital structure consists of 40% debt and 60% equity, and its tax rate is 40%. What would Ang's beta be if it used no debt, i.e., what is its unlevered beta?

Correct Answer
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Exam 15: Capital Structure Decisions

Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The firm's target capital structure should be consistent with which of the following statements?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Ang Enterprises has a levered beta of 1.10, its capital structure consists of 40% debt and 60% equity, and its tax rate is 40%. What would Ang's beta be if it used no debt, i.e., what is its unlevered beta?

Correct AnswerverifiedShow Answer

Correct Answer
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