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71. Down Bedding has an unlevered cost of capital of
13 percent, a cost of debt of 7.8 percent, and a tax rate of 32 percent. What
is the target debtequity ratio if the targeted cost of equity is 15.51
percent?
A. .63
B. .68
C. .71
D. .76
E. .84
72. Johnson Tire Distributors has debt with both a
face and a market value of $12,000. This debt has a coupon rate of 6 percent
and pays interest annually. The expected earnings before interest and taxes are
$2,100, the tax rate is 30 percent, and the unlevered cost of capital is 11.7
percent. What is the firm's cost of equity?
A. 22.46 percent
B. 22.87 percent
C. 23.20 percent
D. 23.59 percent
E. 25.14 percent
73. Country Markets has an unlevered cost of capital
of 12 percent, a tax rate of 38 percent, and expected earnings before interest
and taxes of $15,700. The company has $11,000 in bonds outstanding that have a
6 percent coupon and pay interest annually. The bonds are selling at par value.
What is the cost of equity?
A. 12.55 percent
B. 13.36 percent
C. 13.64 percent
D. 14.07 percent
E. 14.29 percent
74. The Pizza Palace has a cost of equity of 15.3
percent and an unlevered cost of capital of 11.8 percent. The company has
$22,000 in debt that is selling at par value. The levered value of the firm is
$41,000 and the tax rate is 34 percent. What is the pretax cost of debt?
A. 4.73 percent
B. 6.18 percent
C. 6.59 percent
D. 7.22 percent
E. 9.92 percent
75. The Green Paddle has a cost of equity of 13.73
percent and a pretax cost of debt of 7.6 percent. The debtequity ratio is
0.65 and the tax rate is 32 percent. What is Green Paddle's unlevered cost of
capital?
A. 11.85 percent
B. 12.78 percent
C. 14.29 percent
D. 14.46 percent
E. 15.08 percent
76. Bob's Warehouse has a pretax cost of debt of 8.4
percent and an unlevered cost of capital of 14.6 percent. The firm's tax rate
is 37 percent and the cost of equity is 18 percent. What is the firm's
debtequity ratio?
A. 0.72
B. 0.76
C. 0.79
D. 0.82
E. 0.87
77. Douglass & Frank has a debtequity ratio of
0.45. The pretax cost of debt is 7.6 percent while the unlevered cost of
capital is 13.3 percent. What is the cost of equity if the tax rate is 39
percent?
A. 13.79 percent
B. 14.86 percent
C. 15.92 percent
D. 18.40 percent
E. 18.87 percent
78. The June Bug has a $270,000 bond issue
outstanding. These bonds have a 7.5 percent coupon, pay interest semiannually,
and have a current market price equal to 98.6 percent of face value. The tax
rate is 39 percent. What is the amount of the annual interest tax shield?
A. $3,948.75
B. $4,112.60
C. $5,311.22
D. $7,897.50
E. $8,225.20
79. Georga's Restaurants has 4,500 bonds outstanding
with a face value of $1,000 each and a coupon rate of 8.25 percent. The
interest is paid semiannually. What is the amount of the annual interest tax
shield if the tax rate is 37 percent?
A. $137,362.50
B. $162,411.90
C. $187,750.00
D. $210,420.00
E. $233,887.50
80. D. L. Tuckers has $21,000 of debt outstanding that
is selling at par and has a coupon rate of 7.5 percent. The tax rate is 32
percent. What is the present value of the tax shield?
A. $504
B. $615
C. $644
D. $6,200
E. $6,720
81. Jemisen's has expected earnings before interest
and taxes of $6,200. Its unlevered cost of capital is 13 percent and its tax
rate is 34 percent. The firm has debt with both a book and a face value of
$2,500. This debt has a 9 percent coupon and pays interest annually. What is
the firm's weighted average cost of capital?
A. 12.48 percent
B. 12.66 percent
C. 13.87 percent
D. 14.14 percent
E. 14.37 percent
82. A firm has debt of $12,000, a leveraged value of
$26,400, a pretax cost of debt of 9.20 percent, a cost of equity of 17.6
percent, and a tax rate of 37 percent. What is the firm's weighted average cost
of capital?
A. 11.47 percent
B. 11.52 percent
C. 11.69 percent
D. 12.23 percent
E. 12.48 percent
83. Young's Home Supply has a debtequity ratio of
0.80. The cost of equity is 14.5 percent and the aftertax cost of debt is 4.9
percent. What will the firm's cost of equity be if the debtequity ratio is
revised to 0.75?
A. 10.89 percent
B. 11.47 percent
C. 11.70 percent
D. 13.89 percent
E. 14.23 percent
84. Percy's Wholesale Supply has earnings before
interest and taxes of $106,000. Both the book and the market value of debt is
$170,000. The unlevered cost of equity is 15.5 percent while the pretax cost
of debt is 8.6 percent. The tax rate is 38 percent. What is the firm's weighted
average cost of capital?
A. 11.94 percent
B. 12.65 percent
C. 13.45 percent
D. 14.01 percent
E. 14.37 percent
Essay
Questions
85. Draw the following two graphs, one above the other: In the top graph, plot firm value on the vertical axis and total debt on the horizontal axis. Use this graph to illustrate the value of a firm under M&M without taxes, M&M with taxes, and the static theory of capital structure. On the lower graph, plot the WACC on the vertical axis and the debtequity ratio on the horizontal axis. Use this second graph to illustrate the value of the firm's WACC under M&M without taxes, M&M with taxes, and the static theory. Briefly explain what the two graphs reveal about firm value and its cost of capital under the three different theories.
86. Based on the M&M propositions with and without taxes, how much time should a financial manager spend analyzing the capital structure of a firm? What if the analysis is based on the static theory?
87. Pete is the CFO of Dexter International. He would like to increase the debtequity ratio of the firm but is concerned that the firm's shareholders may not be willing to accept additional financial leverage. Pete has come to you for advice. What is your recommendation?
88. In each of the theories of capital structure, the cost of equity increases as the amount of debt increases. So why don't financial managers use as little debt as possible to keep the cost of equity down? After all, aren't financial managers supposed to maximize the value of a firm?
89. Explain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.

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