1). Which of the following statements regarding interest tax shields is correct?
- Taxes are reduced by the amount of a firm’s interest-bearing debt.
- Taxable income is reduced by the amount of a firm’s interest-bearing debt.
- Taxes are reduced by the amount of the interest on a firm’s debt.
- ( Taxable income is reduced by the amount of the interest on a firm’s debt. )
2). Which of the following would NOT be considered a cost of financial distress?
- ( Lack of interest tax shields )
- Bankruptcy costs
- Excessive risk-taking by shareholders
- Loss of customers or suppliers
3). When considering the impact of distress costs on capital structure, which of the following facts should lead ABC Corporation to set a higher target debt ratio than XYZ Corporation (all else equal)?
- ( ABC’s cash flows from operations are less volatile than XYZ’s. )
- ABC is a computer software firm, and XYZ is an electric utility.
- ABC operates in a more competitive industry than XYZ.
- ABC’s assets have lower resale values than XYZ’s assets.
4). According to the pecking order theory of capital structure, why do firms avoid issuing equity?
- Because fees associated with issuing new equity are so high
- Because they want to avoid dilution of earnings per share
- Because they do not want to commit to paying dividends on the new equity
- ( Because equity issuance signals negative information about the firm )
5). Under the simplifying assumptions of Modigliani and Miller, an increase in a firm’s financial leverage will
- ( increase the variability in earnings per share. )
- reduce the operating risk of the firm.
- increase the value of the firm.
- decrease the value of the firm.
6).
Please refer to the financial information for Squamish Equipment above. For next year, calculate Squamish’s times-burden-covered ratio if Squamish sells 2 million new shares at $20 a share.
- 1.03
- 1.38
- 1.60
- 1.89
- ( 2.10 )
- None of the options are correct.
7).
Please refer to the financial information for Squamish Equipment above. For next year, calculate Squamish’s earnings per share if Squamish sells 2 million new shares at $20 a share.
- 1.28
- 1.39
- ( 2.00 )
- 2.22
- 4.00
- None of the options are correct.
8).
Please refer to the financial information for Squamish Equipment above. Calculate Squamish’s times-interest-earned ratio for next year assuming the firm issues $40 million of new debt at an interest rate of 7%.
Top of Form
- 2.00
- 3.09
- 3.66
- ( 4.35 )
- None of the options are correct.
9).
Please refer to the financial information for Squamish Equipment above. Calculate Squamish’s times-burden-covered ratio for the next year assuming the firm issues $40 million of new debt at an interest rate of 7%, and that annual sinking fund payments on the new debt will equal $8 million.
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- 1.01
- 1.08
- 1.38
- ( 1.49 )
- 1.95
- None of the options are correct.
10).
Please refer to the financial information for Squamish Equipment above. Calculate Squamish’s earnings per share next year assuming Squamish issues $40 million of new debt at an interest rate of 7%.
Top of Form
- 1.28
- 2.00
- ( 2.12 )
- 2.22
- 3.06
- None of the options are correct.
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