Question 1

The Miller model begins with the MM model with taxes and then adds personal taxes.

Accepted Answer

A) True 
 B)False

Question 2

The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
-What is the firm's cost of equity?

Accepted Answer

A)   21.0%
B)   23.3%
C)   25.9%
D)   28.8%
E)   32.0%F) None of the above
G) A) and D)

Question 3

In the MM extension with growth, the appropriate discount rate for the tax shield is the unlevered cost of equity.

Accepted Answer

A) True 
 B)False

Question 4

MM showed that in a world without taxes, a firm's value is not affected by its capital structure.

Accepted Answer

A) True 
 B)False

Question 5

When a firm has risky debt, its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the equity.

Accepted Answer

A) True 
 B)False

Question 6

Your firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is the value of your firm's tax shield, i.e., how much value does the use of debt add?

Accepted Answer

A)   $92,571
B)   $102,857
C)   $113,143
D)   $124,457
E)   $136,903F) C) and D)
G) A) and C)

Question 7

The MM model is the same as the Miller model, but with zero corporate taxes.

Accepted Answer

A) True 
 B)False

Question 8

The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
-What is the value of the firm according to MM with corporate taxes?

Accepted Answer

A)   $475,875
B)   $528,750
C)   $587,500
D)   $646,250
E)   $710,875F) A) and E)
G) B) and E)

Question 9

According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Accepted Answer

A)   The tax shields should be discounted at the unlevered cost of equity.
B)   The value of a growing tax shield is greater than the value of a constant tax shield.
C)   For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax)  assumptions.
D)   For a given D/S, the WACC is less than the WACC under MM's original (with tax)  assumptions.
E)   The total value of the firm increases with the amount of debt.F) A) and B)
G) A) and E)

Question 11

In the MM extension with growth, the appropriate discount rate for the tax shield is the WACC.

Accepted Answer

A) True 
 B)False

Exam 16: Capital Structure Decisions: Part II

Correct Answer
verified

When a firm has risky debt, its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the equity.

Correct Answer
verified

The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. -What is the firm's cost of equity?

Correct Answer
verified

MM showed that in a world without taxes, a firm's value is not affected by its capital structure.

Correct Answer
verified

The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. -What is the value of the firm according to MM with corporate taxes?

Correct Answer
verified

In the MM extension with growth, the appropriate discount rate for the tax shield is the WACC.

Correct Answer
verified

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Correct Answer
verified

In the MM extension with growth, the appropriate discount rate for the tax shield is the unlevered cost of equity.

Correct Answer
verified

The MM model is the same as the Miller model, but with zero corporate taxes.

Correct Answer
verified

The Miller model begins with the MM model with taxes and then adds personal taxes.

Correct Answer
verified

According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

Correct Answer
verified

Exam 16: Capital Structure Decisions: Part II

Correct AnswerverifiedShow Answer

When a firm has risky debt, its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the equity.

Correct AnswerverifiedShow Answer

The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. -What is the firm's cost of equity?

Correct AnswerverifiedShow Answer

MM showed that in a world without taxes, a firm's value is not affected by its capital structure.

Correct AnswerverifiedShow Answer

The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. -What is the value of the firm according to MM with corporate taxes?

Correct AnswerverifiedShow Answer

In the MM extension with growth, the appropriate discount rate for the tax shield is the WACC.

Correct AnswerverifiedShow Answer

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Correct AnswerverifiedShow Answer

In the MM extension with growth, the appropriate discount rate for the tax shield is the unlevered cost of equity.

Correct AnswerverifiedShow Answer

The MM model is the same as the Miller model, but with zero corporate taxes.

Correct AnswerverifiedShow Answer

The Miller model begins with the MM model with taxes and then adds personal taxes.

Correct AnswerverifiedShow Answer

According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

Correct AnswerverifiedShow Answer

Correct Answer
verified

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