How much value to the unlevered firm per dollar of debt

Question

1. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?

• Corporate tax rate: 34%
• Personal tax rate on income from bonds: 20%
• Personal tax rate on income from stocks: 50% 

1. $-0.050
2. $-0.188
3. $0.367
4. $0.588
5. None of these

2. A firm has a debt-to-equity ratio of 1. Its cost of equity is 16%, and its cost of debt is 8%. If the corporate tax rate is 25%, what would the cost of equity be if the debt-to-equity ratio were 0?

1. 11.11%
2. 12.57%
3. 13.33%
4. 16.00%
5. None of these

3. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?

• Corporate tax rate: 34%
• Personal tax rate on income from bonds: 20%
• Personal tax rate on income from stocks: 0% 

1. $0.175
2. $0.472
3. $0.528
4. $0.825
5. None of the above

4. Suppose the Barges Corporation's common stock has an expected return of 12%. Assume that the risk-free rate is 5%, and the market risk premium is 6%. If no unsystematic influence affected Barges' return, the beta for Barges is ______.

1. 1.00 
2. 1.17 
3. 1.20 
4. 2.50 
5. It is impossible to calculate with the information given. 

5. All else equal, a more liquid stock will have a lower ________.

1. beta
2. market premium
3. cost of capital
4. Both beta and market premium.
5. Both beta and cost of capital.

6. Holden Bicycles has 2,000 shares outstanding each with a par value of $0.50. If they are sold to shareholders at $12 each, what would the capital surplus be?

1. $1,000
2. $12,000
3. $15,000
4. $23,000
5. $24,000

7. The interest tax shield has no value for a firm when:

• the tax rate is equal to zero.
• the debt-equity ratio is exactly equal to 1.
• the firm is unlevered.
• a firm elects 100% equity as its capital structure. 

 

1. I and III only
2. II and IV only
3. I, III, and IV only
4. II, III, and IV only
5. I, II, and IV only

8. The returns on your portfolio over the last 5 years were -5%, 20%, 0%, 10% and 5%. What is the standard deviation of your return?

1. 5.21% 
2. 10.12% 
3. 9.62% 
4. 12.70% 
5. 2.74% 

9. A stock has returns of 3%, 18%, -24%, and 16% for the past four years. Based on this information, what is the 95% probability range for any one given year?

1. -8.4 to 11.7%
2. -16.1 to 22.6%
3. -24.5 to 34.3%
4. -35.4 to 41.9%
5. -54.8 to 61.3%

10. Estimates using the arithmetic average will probably tend to _____ values over the long-term while estimates using the geometric average will probably tend to _____ values over the short-term.

1. underestimate; overestimate 
2. overestimate; overestimate 
3. underestimate; underestimate 
4. overestimate; underestimate 
5. accurately; accurately 

11. Rockwell Corporation had net income of $150,000 for the year ending 2008. The company decided to payout 40% of earnings per share as a dividend. Rockwell has 120,000 shares issued and outstanding. What are the retained earnings for 2008?

1. $40,000 
2. $60,000 
3. $90,000 
4. $150,000 
5. None of the above 

12. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?

• Corporate tax rate: 34%
• Personal tax rate on income from bonds: 20%
• Personal tax rate on income from stocks: 50%

1. $-0.050
2. $-0.188
3. $0.367
4. $0.588
5. None of these

13. A firm has a debt-to-equity ratio of 1. Its cost of equity is 16%, and its cost of debt is 8%. If the corporate tax rate is 25%, what would the cost of equity be if the debt-to-equity ratio were 0?

1. 11.11%
2. 12.57%
3. 13.33%
4. 16.00%
5. None of these

14. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?

• Corporate tax rate: 34%
• Personal tax rate on income from bonds: 20%
• Personal tax rate on income from stocks: 0%

1. $0.175
2. $0.472
3. $0.528
4. $0.825
5. None of the above

15. Suppose the Barges Corporation's common stock has an expected return of 12%. Assume that the risk-free rate is 5%, and the market risk premium is 6%. If no unsystematic influence affected Barges' return, the beta for Barges is
______.

1. 1.00
2. 1.17
3. 1.20
4. 2.50
5. It is impossible to calculate with the information given.

16. All else equal, a more liquid stock will have a lower ________.

1. beta
2. market premium
3. cost of capital
4. Both beta and market premium.
5. Both beta and cost of capital.

17. Holden Bicycles has 2,000 shares outstanding each with a par value of $0.50. If they are sold to shareholders at $12 each, what would the capital surplus be?

1. $1,000
2. $12,000
3. $15,000
4. $23,000
5. $24,000

18. The interest tax shield has no value for a firm when:

•  the tax rate is equal to zero.
•  the debt-equity ratio is exactly equal to 1.
•  the firm is unlevered.
•  a firm elects 100% equity as its capital structure.

1. I and III only
2. II and IV only
3. I, III, and IV only
4. II, III, and IV only
5. I, II, and IV only

19. The returns on your portfolio over the last 5 years were -5%, 20%, 0%, 10% and 5%. What is the standard deviation of your return?

1. 5.21%
2. 10.12%
3. 9.62%
4. 12.70%
5. 2.74%

20. A stock has returns of 3%, 18%, -24%, and 16% for the past four years. Based on this information, what is the 95% probability range for any one given year?

1. -8.4 to 11.7%
2. -16.1 to 22.6%
3. -24.5 to 34.3%
4. -35.4 to 41.9%
5. -54.8 to 61.3%

21. Estimates using the arithmetic average will probably tend to _____ values over the long-term while estimates using the geometric average will probably tend to _____ values over the short-term.

1. underestimate; overestimate
2. overestimate; overestimate
3. underestimate; underestimate
4. overestimate; underestimate
5. accurately; accurately

22. Rockwell Corporation had net income of $150,000 for the year ending 2008. The company decided to payout 40% of earnings per share as a dividend. Rockwell has 120,000 shares issued and outstanding. What are the retained earnings for 2008?

1. $40,000
2. $60,000
3. $90,000
4. $150,000
5. None of the above