LAA Tours is comparing two capital structures to determine how to best finance its operations. The first option consists of all equity financing. The second option is based on a debt-equity ratio of 0.45. What should AA Tours do if its expected earnings before interest and taxes (EBIT) are less than the break-even level? Assume there are no taxes. A select the leverage option because the debt-equity ratio is less than 0.50 B select the leverage option since the expected EBIT is less than the break-even level C select the unlevered option since the debt-equity ratio is less than 0.50 D. select the unlevered option since the expected EBIT is less than the break-even level E cannot be determined from the information provided g. The interest tax shield has no value when a firm has a 1 tax rate of zero Il debt-equity ratio of 1 W zero debt V. zero leverage A land ill only 8. I and IV only CL, and IV only DII, II, and IV only ELII and IV only h The capital structure that maximizes the value of a firm also: A minimizes financial distress costs. 8. minimizes the cost of capital. C maximizes the present value of the tax shield-on debt D. maximizes the value of the debt. E maximizes the value of the unlevered firm. L. The expected risk premium on a stock is equal to the expected return on the stock minus the: A. expected market rate of return. B. risk-free rate. C. inflation rate. D standard deviation. E. variance. The dividend growth model A is only as reliable as the estimated rate of growth. 8. considers the risk that future dividends may vary from their estimated values. C can only be used if historical dividend information is available. D. uses beta to measure the systematic risk of a firm. 2) Jemisen's has expected earnings before interest and taxes of $6,200. Its unlevered cost of capital is 14 percent and its tax rate is 34 percent. The firm has debt with both a book and a market value of $2,500. This debt has a 9 percent coupon and pays interest annually. What is the firm's weighted average cost of capital? (20pt) The cost of preferred stock is computed the same as the A pre-tax cost of debt. 8 return on an annuity. C aftertax cost of debt. D return on a perpetuity. E cost of an irregular growth common stock d. The June Bug has a $270,000 bond issue outstanding. These bonds have a 75 percent coupon, pay interest annually, and have a current market price equal to 98.5 percent of face value. The tax rate is 39 percent. What is the amount of the annual interest tax shield? A. $3,948.75 B. $4,112.60 C. $5,311.22 D. $7,897.50 E $8,225.20 e Executive Tours has decided to take its firm public and has hired an investment firm to handle this offering The investment firm is serving as ain): A. aftermarket specialist Eventure capitalist C underwriter D. primary investor. 3) East Side, Inc. has no debt outstanding and a total market value of $136,000. Earnings before interest and taxes, EBIT, are projected to be $12,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 27 percent higher. If there is a recession, then EBIT will be 55 percent lower. East Side is considering a $54,000 debt issue with a 5 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,000 shares outstanding. Ignore taxes. If the economy enters a recession, EPS will change by- . percent as compared to a normal economy, assuming that the firm recapitalizes. (20pt) - 4) Based on the M & M propositions with and without taxes, how should a financial manager decide on the capital structure of a firm? (5pt) What if the analysis is based on the static theory? (5pt) LAA Tours is comparing two capital structures to determine how to best finance its operations. The first option consists of all equity financing. The second option is based on a debt-equity ratio of 0.45. What should AA Tours do if its expected earnings before interest and taxes (EBIT) are less than the break-even level? Assume there are no taxes. A select the leverage option because the debt-equity ratio is less than 0.50 8. select the leverage option since the expected EBIT is less than the break-even level C select the unlevered option since the debt-equity ratio is less than 0.50 D. select the unlevered option since the expected EBIT is less than the break-even level E cannot be determined from the information provided g. The interest tax shield has no value when a firm has a t tax rate of zero. Il debt-equity ratio of 1. It zero debt N. zero leverage. A. I and ill only B. II and IV only CLII and IV only D II, III, and IV only E L II and IV only LAA Tours is comparing two capital structures to determine how to best finance its operations. The first option consists of all equity financing. The second option is based on a debt-equity ratio of 0.45. What should AA Tours do if its expected earnings before interest and taxes (EBIT) are less than the break-even level? Assume there are no taxes. A select the leverage option because the debt-equity ratio is less than 0.50 B select the leverage option since the expected EBIT is less than the break-even level C select the unlevered option since the debt-equity ratio is less than 0.50 D. select the unlevered option since the expected EBIT is less than the break-even level E cannot be determined from the information provided g. The interest tax shield has no value when a firm has a 1 tax rate of zero Il debt-equity ratio of 1 W zero debt V. zero leverage A land ill only 8. I and IV only CL, and IV only DII, II, and IV only ELII and IV only h The capital structure that maximizes the value of a firm also: A minimizes financial distress costs. 8. minimizes the cost of capital. C maximizes the present value of the tax shield-on debt D. maximizes the value of the debt. E maximizes the value of the unlevered firm. L. The expected risk premium on a stock is equal to the expected return on the stock minus the: A. expected market rate of return. B. risk-free rate. C. inflation rate. D standard deviation. E. variance. The dividend growth model A is only as reliable as the estimated rate of growth. 8. considers the risk that future dividends may vary from their estimated values. C can only be used if historical dividend information is available. D. uses beta to measure the systematic risk of a firm. 2) Jemisen's has expected earnings before interest and taxes of $6,200. Its unlevered cost of capital is 14 percent and its tax rate is 34 percent. The firm has debt with both a book and a market value of $2,500. This debt has a 9 percent coupon and pays interest annually. What is the firm's weighted average cost of capital? (20pt) The cost of preferred stock is computed the same as the A pre-tax cost of debt. 8 return on an annuity. C aftertax cost of debt. D return on a perpetuity. E cost of an irregular growth common stock d. The June Bug has a $270,000 bond issue outstanding. These bonds have a 75 percent coupon, pay interest annually, and have a current market price equal to 98.5 percent of face value. The tax rate is 39 percent. What is the amount of the annual interest tax shield? A. $3,948.75 B. $4,112.60 C. $5,311.22 D. $7,897.50 E $8,225.20 e Executive Tours has decided to take its firm public and has hired an investment firm to handle this offering The investment firm is serving as ain): A. aftermarket specialist Eventure capitalist C underwriter D. primary investor. 3) East Side, Inc. has no debt outstanding and a total market value of $136,000. Earnings before interest and taxes, EBIT, are projected to be $12,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 27 percent higher. If there is a recession, then EBIT will be 55 percent lower. East Side is considering a $54,000 debt issue with a 5 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 2,000 shares outstanding. Ignore taxes. If the economy enters a recession, EPS will change by- . percent as compared to a normal economy, assuming that the firm recapitalizes. (20pt) - 4) Based on the M & M propositions with and without taxes, how should a financial manager decide on the capital structure of a firm? (5pt) What if the analysis is based on the static theory? (5pt) LAA Tours is comparing two capital structures to determine how to best finance its operations. The first option consists of all equity financing. The second option is based on a debt-equity ratio of 0.45. What should AA Tours do if its expected earnings before interest and taxes (EBIT) are less than the break-even level? Assume there are no taxes. A select the leverage option because the debt-equity ratio is less than 0.50 8. select the leverage option since the expected EBIT is less than the break-even level C select the unlevered option since the debt-equity ratio is less than 0.50 D. select the unlevered option since the expected EBIT is less than the break-even level E cannot be determined from the information provided g. The interest tax shield has no value when a firm has a t tax rate of zero. Il debt-equity ratio of 1. It zero debt N. zero leverage. A. I and ill only B. II and IV only CLII and IV only D II, III, and IV only E L II and IV only