Question 1

A firm's business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses.

Accepted Answer

A) True 
 B)False

Question 2

Vafeas Inc.'s capital structure consists of 80% debt and 20% common equity, its beta is 1.60, and its tax rate is 35%. However, the CFO thinks the company has too much debt, and he is considering moving to a capital structure with 40% debt and 60% equity. The risk-free rate is 5.0% and the market risk premium is 6.0%. By how much would the capital structure shift change the firm's cost of equity?

Accepted Answer

A)   -5.20%
B)   -5.78%
C)   -6.36%
D)   -6.99%
E)   -7.69%F) A) and B)
G) A) and C)

Question 3

Now assume that AJC is considering changing from its original capital structure to a new capital structure with 50% debt and 50% equity. If it makes this change, its resulting market value would be $820,000. What would be its new stock price per share?

Accepted Answer

A)   $58
B)   $59
C)   $60
D)   $61
E)   $62F) D) and E)
G) A) and B)

Question 4

Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?

Accepted Answer

A)   An increase in the corporate tax rate.
B)   An increase in the personal tax rate.
C)   An increase in the company's operating leverage.
D)   The Federal Reserve tightens interest rates in an effort to fight inflation.
E)   The company's stock price hits a new high.F) B) and D)
G) C) and D)

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)   A firm's business risk is determined solely by the financial characteristics of its industry.
B)   The factors that affect a firm's business risk are affected by industry characteristics and economic conditions. Unfortunately, these factors are generally beyond the control of the firm's management.
C)   One of the benefits to a firm of being at or near its target capital structure is that this eliminates any risk of bankruptcy.
D)   A firm's financial risk can be minimized by diversification.
E)   The amount of debt in its capital structure can under no circumstances affect a company's business risk.F) A) and B)
G) None of the above

Question 6

Dabney Electronics currently has no debt. Its operating income is $20 million and its tax rate is 40%. It pays out all of its net income as dividends and has a zero growth rate. The current stock price is $40 per share, and it has 2.5 million shares of stock outstanding. If it moves to a capital structure that has 40% debt and 60% equity (based on market values) , its investment bankers believe its weighted average cost of capital would be 10%. What would its stock price be if it changes to the new capital structure?

Accepted Answer

A)   $40
B)   $48
C)   $52
D)   $54
E)   $60F) None of the above
G) B) and E)

Question 7

DeLong Inc. has fixed operating costs of $470,000, variable costs of $2.80 per unit produced, and its products sell for $4.00 per unit. What is the company's breakeven point, i.e., at what unit sales volume would income equal costs?

Accepted Answer

A)   391,667
B)   411,250
C)   431,813
D)   453,403
E)   476,073F) A) and C)
G) A) and E)

Question 8

(The following data apply to Problems 69, 70, 71, and 72. The problems MUST be kept together, and they cannot be changed algorithmically.) 
The A. J. Croft Company (AJC)  currently has $200,000 market value (and book value)  of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT)  are $100,000, and it is a zero growth company. AJC's current cost of equity is 8.8%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00.
-What is AJC's current total market value and weighted average cost of capital?

Accepted Answer

A)   $600,000; 7.5%
B)   $600,000; 8.0%
C)   $800,000; 7.0%
D)   $800,000; 7.5%
E)   $800,000; 8.0%F) A) and E)
G) A) and D)

Question 9

Senbet Ventures is considering starting a new company to produce stereos. The sales price would be set at 1.5 times the variable cost per unit; the VC/unit is estimated to be $2.50; and fixed costs are estimated at $120,000. What sales volume would be required in order to break even, i.e., to have an EBIT of zero for the stereo business?

Accepted Answer

A)   86,640
B)   91,200
C)   96,000
D)   100,800
E)   105,840F) B) and D)
G) None of the above

Question 10

Now assume that AJC is considering changing from its original capital structure to a new capital structure that results in a stock price of $64 per share. The resulting capital structure would have a $336,000 total market value of equity and a $504,000 market value of debt. How many shares would AJC repurchase in the recapitalization?

Accepted Answer

A)   4,250
B)   4,500
C)   4,750
D)   5,000
E)   5,250F) A) and E)
G) D) and E)

Exam 15: Capital Structure Decisions

Correct Answer
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DeLong Inc. has fixed operating costs of $470,000, variable costs of $2.80 per unit produced, and its products sell for $4.00 per unit. What is the company's breakeven point, i.e., at what unit sales volume would income equal costs?

Correct Answer
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Correct Answer
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A firm's business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses.

Correct Answer
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Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?

Correct Answer
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Now assume that AJC is considering changing from its original capital structure to a new capital structure with 50% debt and 50% equity. If it makes this change, its resulting market value would be $820,000. What would be its new stock price per share?

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Exam 15: Capital Structure Decisions

Correct AnswerverifiedShow Answer

DeLong Inc. has fixed operating costs of $470,000, variable costs of $2.80 per unit produced, and its products sell for $4.00 per unit. What is the company's breakeven point, i.e., at what unit sales volume would income equal costs?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A firm's business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses.

Correct AnswerverifiedShow Answer

Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?

Correct AnswerverifiedShow Answer

Now assume that AJC is considering changing from its original capital structure to a new capital structure with 50% debt and 50% equity. If it makes this change, its resulting market value would be $820,000. What would be its new stock price per share?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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