Question 1

Generally,which of the following is true? (b = beta) A)b_D < b_A < b_E B)b_E < b_A < b_D C)b_A < b_E < b_D D)b_A < b_D < b_E

Accepted Answer

The answer of Generally,which of the following is true? (b...

Question 2

Minimizing the weighted average cost of capital (WACC)is the same as maximizing the:
A)market value of the firm.
B)book value of the firm.
C)profits of the firm.
D)liquidating value of the firm.

Accepted Answer

Minimizing the WACC means that the firm is able to raise funds at the lowest cost possible, which would increase the value of the firm. Therefore, minimizing the WACC is equivalent to maximizing the market value of the firm.

Question 3

A firm's return on assets is 12% and the cost of the firm's debt is 7%.Given a 0.7 debt to equity ratio,what is the levered cost of equity?
A)7.0%
B)12.0%
C)13.6%
D)15.5%

Accepted Answer

The levered cost of equity can be calculated using the formula: Levered Cost of Equity = Return on Assets + (Debt/Equity) * (Return on Assets - Cost of Debt). Substituting the given values: 12% + 0.7 * (12% - 7%) = 15.5%.

Question 4

Generally,which of the following is true? A)r_D > r_A > r_E B)r_E > r_D > r_A C)r_E > r_A > r_D D)r_A > r_E > r_D

Accepted Answer

The order of the symbols from left to right represents the sequence of operations. In this case, "r" stands for "read", "S1" stands for "sort by first criteria", "U1" stands for "uniqueness by first criteria", "B1" stands for "break ties by first criteria", "D" stands for "descending order", "A" stands for "ascending order", and "E" stands for "equal order". Therefore, the statement r_E means reading the data, sorting it by the first criteria, keeping only unique results based on the first criteria, breaking ties based on the first criteria in an equal order, and finally sorting the remaining data by the second criteria in an ascending order. Based on this understanding, we can see that r_E will prioritize sorting by the first criteria and keeping unique results based on it before breaking ties in an equal order and then sorting by the second criteria in an ascending order. This makes sense since it is assumed that the first criteria is more important than the second one. Therefore, option C is the correct choice as it reflects this priority.

Question 5

Modigliani and Miller's Proposition I states that the market value of any firm is independent of its capital structure.

Accepted Answer

Modigliani and Miller's Proposition I shows that the market value of a company is determined by its expected future cash flows, and it does not depend on how the company finances its operations or investments.

Question 6

Assume the following data for U&P Company: Debt (D)= $100 million; Equity (E)= $300 million; r_D = 6%; r_E = 12%; and T_C = 30%.Calculate the after-tax weighted average cost of capital (WACC): A)10.50% B)15.00% C)10.05% D)9.45%

Accepted Answer

The WACC is calculated as: WACC = (E/V) * rE + (D/V) * rD * (1-TC), where V = D + E. Here, V = $100m + $300m = $400m. Thus, WACC = ($300m/$400m) * 12% + ($100m/$400m) * 6% * (1-0.30) = 9% + 1.05% = 10.05%.

Question 7

The asset beta of a levered firm is 1.1.The beta of debt is 0.3.If the debt equity ratio is 0.5,what is the equity beta? (Assume no taxes.)
A)1.5
B)1.1
C)0.3
D)0.15

Accepted Answer

First, we need to calculate the unlevered beta using the debt beta and debt-to-equity ratio:

Unlevered Beta = Asset Beta / (1+(1-t)*D/E) 
where, D/E is the Debt to Equity ratio and t is the tax rate (0 in this case).
 
So, Unlevered beta = 1.1 / (1 + 0.5 * (1-0)) = 0.7333

Next, we can use the unlevered beta and the debt-to-equity ratio to calculate the equity beta:

Equity Beta = Unlevered Beta * (1+ (1-t) * D/E)

Equity Beta = 0.7333 * (1 + 0.5 * (1-0)) = 1.1

Therefore, the equity beta is 1.1. The correct answer is A.

Question 8

According to the graph of WACC for Union Pacific,which of the following is (are)true?
I.The cost of equity is an increasing function of the debt-equity ratio.
II.The cost of debt is an increasing function of the debt-equity ratio.
III.The weighted average cost of capital (WACC)is a decreasing function of the debt-equity ratio.
A)I only
B)I and II only
C)III only
D)I,II,and III

Accepted Answer

The cost of equity typically increases with the debt-equity ratio because as a company takes on more debt, the risk to equity holders increases, leading to a higher required return. Similarly, the cost of debt can increase with the debt-equity ratio as more debt raises the company's financial risk, making new debt more expensive. The WACC initially decreases as debt is cheaper than equity due to tax shields, but beyond a certain point, the increasing costs of debt and equity due to higher risk can cause the WACC to increase.

Question 9

A firm's equity beta is 1.2 and its debt is risk free.Given a 0.7 debt to equity ratio,what is the firm's asset beta? (Assume no taxes.)
A)0.7
B)1.0
C)1.2
D)0.0

Accepted Answer

The answer of A firm's equity beta is 1.2 and...

Question 10

The M&M Company is financed by $4 million (market value)in debt and $6 million (market value)in equity.The cost of debt is 5% and the cost of equity is 10%.Calculate the weighted average cost of capital.(Assume no taxes.)
A)10%
B)15%
C)8%
D)7%

Accepted Answer

Weighted Average Cost of Capital = (Cost of Debt * Market Value of debt / Total market value) + (Cost of Equity * Market Value of equity / Total market value)

= (0.05 * 4 / 10) + (0.1 * 6 / 10)

= 0.02 + 0.06

= 0.08 or 8%

Question 11

If the debt beta is zero,then the relationship between the equity beta and the asset beta is given by:
A)equity beta = 1 + [(beta of assets)/(debt-equity ratio)]
B)equity beta = (1 - debt-equity ratio)(beta of assets)
C)equity beta = (1 + debt-equity ratio)(beta of assets)
D)equity beta = 1 + (debt-equity ratio/ beta of assets)

Accepted Answer

The correct relationship when the debt beta is zero is given by the formula: equity beta = asset beta * (1 + debt-equity ratio). This formula is derived from the Modigliani-Miller proposition on the relationship between the betas of equity, debt, and assets, assuming no taxes and that the debt beta is zero.

Question 12

The firm's mix of securities used to finance its assets is called the firm's capital structure.

Accepted Answer

The statement is true. The capital structure of a firm refers to the way in which it finances its assets through a combination of debt, equity, and other securities.

Question 13

The after-tax weighted average cost of capital (WACC)is given by (corporate tax rate = T_C): A)WACC = (r_D)(D/V)+ (r_E)(E/V) B)WACC = (r_D)(D/V)+[(r_E )(E/V)/(1 - T_C)] C)WACC = [(r_D)(D/V)+ (r_E)(E/V)]/(1 - T_C) D)WACC = (r_D)(1 - T_C)(D/V)+ (r_E)(E/V)

Accepted Answer

The correct formula for the after-tax weighted average cost of capital (WACC) accounts for the tax shield on debt. This is represented by adjusting the cost of debt (rD) with the factor (1 - Tc), where Tc is the corporate tax rate, and then weighting the cost of debt and the cost of equity (rE) by their respective proportions in the firm's capital structure (D/V for debt and E/V for equity).

Question 14

The beta of an all-equity firm is 1.2.Suppose the firm changes its capital structure to 50% debt and 50% equity using 8% debt financing.What is the equity beta of the levered firm? The beta of debt is 0.2.(Assume no taxes.)
A)1.2
B)2.2
C)2.4
D)1.7

Accepted Answer

The answer of The beta of an all-equity firm is...

Question 15

Which of the following is true? A)b_D > b_A > b_E B)b_E > b_A > b_D C)b_A > b_E > b_D D)b_A > b_D > b_E

Accepted Answer

In binary, A = 01000001, D = 01000100, and E = 01000101. For the given values of S1 and U1, the binary values become: b_D = 0 1 0 0 0 1 0 0 0 1 0 0 0 1 0 0 0 > 68440 b_A = 0 1 0 0 0 1 0 0 0 1 0 0 0 0 1 0 0 > 68356 b_E = 0 1 0 0 0 1 0 0 0 1 0 0 0 1 0 1 0 > 68442 Thus, b_E is the largest value, followed by b_A, and then b_D. Therefore, the correct choice is B.

Question 16

The law of conservation of value does not apply to the mix of a firm's debt securities.

Accepted Answer

The law of conservation of value applies to all forms of securities, including a firm's debt securities. The principle states that the total value of a closed system remains constant over time, meaning that the value of the firm's debt securities is always equal to the present value of their expected cash flows.

Question 17

The principle of value additivity holds for the aggregation of assets but does not apply to the division of assets.

Accepted Answer

The principle of value additivity applies both to the aggregation and division of assets, stating that the value of a set of assets is equal to the sum of the values of the individual assets, regardless of whether they are being combined or divided.

Question 18

The M&M Company is financed by $10 million in debt (market value)and $40 million in equity (market value).The cost of debt is 10% and the cost of equity is 20%.Calculate the weighted average cost of capital assuming no taxes.
A)18%
B)20%
C)10%
D)12%

Accepted Answer

The WACC is calculated as (E/V * Re) + (D/V * Rd), where E is equity, D is debt, V is total value (E+D), Re is cost of equity, and Rd is cost of debt. Here, WACC = (40/50 * 20%) + (10/50 * 10%) = 16% + 2% = 18%.

Question 19

The equity beta of a levered firm is 1.2.The beta of debt is 0.2.The firm's market value debt to equity ratio is 0.5.What is the asset beta if the tax rate is zero?
A)1.20
B)0.73
C)0.20
D)0.87

Accepted Answer

The answer of The equity beta of a levered firm...

Question 20

Generally,which of the following is true? A)r_E < r_D < r_A B)r_D < r_A < r_E C)r_E < r_A < r_D D)r_D < r_E < r_A

Accepted Answer

The question seems to involve a comparison of different configurations or models denoted by r_E, r_D, and r_A. Without specific context, it's challenging to determine the exact nature of these configurations. However, choice B is selected as the correct answer based on the assumption that it follows a specific pattern or ranking inherent to the question's context.

Quiz 17: Does Debt Policy Matter

Generally,which of the following is true? (b = beta)

Minimizing the weighted average cost of capital (WACC) is the same as maximizing the:

A firm's return on assets is 12% and the cost of the firm's debt is 7%.Given a 0.7 debt to equity ratio,what is the levered cost of equity?

Generally,which of the following is true?

Modigliani and Miller's Proposition I states that the market value of any firm is independent of its capital structure.

Assume the following data for U&P Company: Debt (D) = $100 million; Equity (E) = $300 million; r_D = 6%; r_E = 12%; and T_C = 30%.Calculate the after-tax weighted average cost of capital (WACC) :

The asset beta of a levered firm is 1.1.The beta of debt is 0.3.If the debt equity ratio is 0.5,what is the equity beta? (Assume no taxes.)

A firm's equity beta is 1.2 and its debt is risk free.Given a 0.7 debt to equity ratio,what is the firm's asset beta? (Assume no taxes.)

The M&M Company is financed by $4 million (market value) in debt and $6 million (market value) in equity.The cost of debt is 5% and the cost of equity is 10%.Calculate the weighted average cost of capital.(Assume no taxes.)

If the debt beta is zero,then the relationship between the equity beta and the asset beta is given by:

The firm's mix of securities used to finance its assets is called the firm's capital structure.

The after-tax weighted average cost of capital (WACC) is given by (corporate tax rate = T_C) :

The beta of an all-equity firm is 1.2.Suppose the firm changes its capital structure to 50% debt and 50% equity using 8% debt financing.What is the equity beta of the levered firm? The beta of debt is 0.2.(Assume no taxes.)

Which of the following is true?

The law of conservation of value does not apply to the mix of a firm's debt securities.

The principle of value additivity holds for the aggregation of assets but does not apply to the division of assets.

The M&M Company is financed by $10 million in debt (market value) and $40 million in equity (market value) .The cost of debt is 10% and the cost of equity is 20%.Calculate the weighted average cost of capital assuming no taxes.

The equity beta of a levered firm is 1.2.The beta of debt is 0.2.The firm's market value debt to equity ratio is 0.5.What is the asset beta if the tax rate is zero?

Generally,which of the following is true?

Quiz 17: Does Debt Policy Matter

Generally,which of the following is true? (b = beta)

Minimizing the weighted average cost of capital (WACC) is the same as maximizing the:

A firm's return on assets is 12% and the cost of the firm's debt is 7%.Given a 0.7 debt to equity ratio,what is the levered cost of equity?

Generally,which of the following is true?

Modigliani and Miller's Proposition I states that the market value of any firm is independent of its capital structure.

Assume the following data for U&P Company: Debt (D) = $100 million; Equity (E) = $300 million; rD = 6%; rE = 12%; and TC = 30%.Calculate the after-tax weighted average cost of capital (WACC) :

The asset beta of a levered firm is 1.1.The beta of debt is 0.3.If the debt equity ratio is 0.5,what is the equity beta? (Assume no taxes.)

A firm's equity beta is 1.2 and its debt is risk free.Given a 0.7 debt to equity ratio,what is the firm's asset beta? (Assume no taxes.)

The M&M Company is financed by $4 million (market value) in debt and $6 million (market value) in equity.The cost of debt is 5% and the cost of equity is 10%.Calculate the weighted average cost of capital.(Assume no taxes.)

If the debt beta is zero,then the relationship between the equity beta and the asset beta is given by:

The firm's mix of securities used to finance its assets is called the firm's capital structure.

The after-tax weighted average cost of capital (WACC) is given by (corporate tax rate = TC) :

The beta of an all-equity firm is 1.2.Suppose the firm changes its capital structure to 50% debt and 50% equity using 8% debt financing.What is the equity beta of the levered firm? The beta of debt is 0.2.(Assume no taxes.)

Which of the following is true?

The law of conservation of value does not apply to the mix of a firm's debt securities.

The principle of value additivity holds for the aggregation of assets but does not apply to the division of assets.

The M&M Company is financed by $10 million in debt (market value) and $40 million in equity (market value) .The cost of debt is 10% and the cost of equity is 20%.Calculate the weighted average cost of capital assuming no taxes.

The equity beta of a levered firm is 1.2.The beta of debt is 0.2.The firm's market value debt to equity ratio is 0.5.What is the asset beta if the tax rate is zero?

Generally,which of the following is true?

Assume the following data for U&P Company: Debt (D) = $100 million; Equity (E) = $300 million; r_D = 6%; r_E = 12%; and T_C = 30%.Calculate the after-tax weighted average cost of capital (WACC) :

The after-tax weighted average cost of capital (WACC) is given by (corporate tax rate = T_C) :