Question 1

The total value (debt plus equity)  of Wilson Dover Inc. is $500 million and the face value of its 1-year coupon debt is $200 million. The volatility ()  of Wilson DOver's total value is 0.60, and the risk-free rate is 5%. Assume that N(d1)  = 0.9720 and N(d2)  = 0.9050.
-is the value (in millions)  of Wilson Dover's debt if its equity is viewed as an option?

Accepted Answer

A)   $167.57
B)   $186.19
C)   $204.81
D)   $225.29
E)   $247.82F) B) and C)
G) All of the above

Question 2

Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Accepted Answer

A)   The value of a growing tax shield is greater than the value of a constant tax shield.
B)   For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax)  assumptions.
C)   For a given D/S, the WACC is greater than the WACC under MM's original (with tax)  assumptions.
D)   The total value of the firm increases with the amount of debt.
E)   The tax shields should be discounted at the cost of debt.F) B) and C)
G) B) and D)

Question 4

market value of Firm L's debt is $200,000 and its yield is 9% The firm's equity has a market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40% A similar firm with no debt has a cost of equity of 12% Under the MM extension with growth, what is Firm L's cost of equity?

Accepted Answer

A)   11.4%
B)   12.0%
C)   12.6%
D)   13.3%
E)   14.0%F) D) and E)
G) C) and E)

Question 5

showed that in a world with taxes, a firm's optimal capital structure would be almost 100% debt.

Accepted Answer

A) True 
 B)False

Exam 16: Cap Structure II

Correct Answer
verified

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Correct Answer
verified

Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

Correct Answer
verified

Correct Answer
verified

showed that in a world with taxes, a firm's optimal capital structure would be almost 100% debt.

Correct Answer
verified

Exam 16: Cap Structure II

Correct AnswerverifiedShow Answer

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Correct AnswerverifiedShow Answer

Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

showed that in a world with taxes, a firm's optimal capital structure would be almost 100% debt.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified