1. A firm has 100 shares of outstanding, cumulative preferred stock that calls for quarterly dividends of $5 per share.The firm has deferred paying a dividend for the last seven quarters.What is the total dollar amount of the outstanding arrearage?
2. Suppose an unlevered firm issues $1000 in debt at a cost of debt of 20%.If the corporate tax rate is 10%, what is the change in the firm's value?Ignore financial distress costs.
3. A firm's cost of unlevered equity is 12% and its pretax cost of debt is 9%.The firm has a debt-equity ratio of 0.2.If the tax rate is 30%, what is the firm's cost of levered equity?
4. If the personal tax rate on stock dividends and the personal tax rate on bonds are the same, then the firm:

• should issue debt, not equity.

• should issue equity, not debt.

• will be indifferent to the choice between a debt issue or an equity issue.

5.A firm is considering issuing bonds.Using the static trade-off theory, the firm's financial staff has advised that if bonds are issued, the value of the firm will decrease. Given this advice, you know the staff believes the firm:

• wants to issue too few bonds to obtain the most benefit from debt.

• currently is all-equity financed and adding debt will cause a decrease in firm value.

• will realize greater tax benefits by issuing equity securities.

• will suffer from a decrease in its WACC if the bonds are issued.

• is at, or has exceeded, its optimal debt-equity ratio.

Answer rating: 100% (QA)

1 The total dollar amount of the outstanding arrearage for the preferred stock can be calculated by ... View the full answer