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Quiz 4 Sample Questions
Quiz 4 Sample Questions
A firm has a tax rate of 35%, an unlevered rate of return of 14%, total debt of $1,000,
and an EBIT of $300.00. What is the unlevered value of the firm?
5. Frontier Markets is an all equity firm that has 35,000 shares of stock outstanding. The
company has decided to borrow the $35,000 that is needed to repurchase 1,000 shares
of stock from the estate of a deceased shareholder. What is the total value of Frontier
Markets if you ignore taxes?
8. A firm has earnings per share of $2.12 on 40,000 shares outstanding. The firm also has
$360,000 in debt at a cost of 9%. Ignore taxes. What is the EBIT?
40000 x 2.12 + 360000 x 0.09=117200
A. $84,800
B. $91,600
C. $102,300
D. $117,200
E. $119,70
9. Your firm has a $475,000 bond issue outstanding. These bonds have a 7.5% coupon, pay
interest semi-annually, and have a current market price equal to 99.6% of face value.
What is the amount of the annual interest tax shield given a tax rate of 34%?
1. M&M Proposition II with no tax states that a firm's cost of equity is dependent upon the firm's
cost of debt financing.
TRUE
2. In relation to M&M Proposition II with no taxes, the cost of equity declines when the amount
of leverage used by a firm rises.
FALSE
3. M&M Proposition II with no tax states that a firm's cost of equity is dependent upon the firm's
interest tax shield.
FALSE
4. M&M Proposition II with no tax states that a firm's cost of equity is dependent upon the
required rate of return on the firm's assets.
TRUE
5. In relation to M&M Proposition II with no taxes, the return on assets is equal to the weighted
average cost of capital.
TRUE
6. Business risk declines as the systematic risk of a firm's assets increases.
FALSE
7. The interest tax shield has no value for a firm when the tax rate is equal to zero.
TRUE
8. The interest tax shield has no value for a firm when the firm is unlevered.
TRUE
9. When taxes are factored in, debt financing lowers a firm's cost of equity.
FALSE