1) Assume the Modigliani-Miller model is correct, and that there are no taxes. The beta of an all equity firm is 1. If the firm changes its capital structure to 50% debt and 50% equity, what will be the beta of the equity of the levered firm? The beta of the debt is 0.2.
a) 1.2
b) 1.4
c) 1.6
d) 1.8
e) 2.0
f) 2.2
g) 2.4
h) Other, specify.
2) L.A. Clothing has expected earnings before interest and taxes of $2,300, an unlevered cost of capital of 15% and a tax rate of 35%. The company also has $2,800 of debt that carries a 7% coupon. The debt is selling at par value. What is the value of this firm?
a) $12,041.33
b) $14,230.67
c) $9,852.00
d) $13,136.00
e) $10,946.67
f) Other, specify
3) The WACC approach to valuation is not as useful as the APV approach in leveraged buyouts because:
a) the value of the levered and unlevered firms are equal.
b) the unlevered and levered cash flows are separated which cannot be used with the WACC approach.
c) there is greater risk with a LBO.
d) the capital structure is changing.
e) there is no tax shield with the WACC.
f) Other, specify.