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Exam 15: Debt and Taxes

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Question 21

Multiple Choice

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Which of the following statements is FALSE?

A) Aside from taxes,another important difference between debt and equity financing is that debt payments must be made to avoid bankruptcy,whereas firms have no similar obligation to pay dividends or realize capital gains.
B) Increasing the level of debt increases the probability of bankruptcy.
C) A firm receives a tax benefit only if it is paying taxes in the first place.
D) To the extent that a firm has other tax shields,its taxable earnings will be increased and it will rely more heavily on the interest tax shield.

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Question 22

Multiple Choice

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Consider the following formula: Τ* = The term τ_i is:

A) the effective personal tax rate on interest income.
B) the effective personal tax rate on equity.
C) the effective corporate tax rate on income.
D) the effective tax advantage of debt.

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Question 23

Multiple Choice

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Consider the following formula: V_L = V_U + τ_cD The term τ_cD represents:

The total amount available to payout to all the investors in Kroger in 2005 is closest to:

Taggart Transcontinental currently has no debt and an equity cost of capital of 16%.Suppose that Taggart decides to increase its leverage and maintain a market debt-to-value ratio of 1/3.Suppose Taggart's debt cost of capital is 9% and its corporate tax rate is 35%.Assuming that Taggart's pre-tax WACC remains constant,then with the addition of leverage its effective after-tax WACC will be closest to:

Which of the following statements is FALSE?

Consider the following formula: V_L = V_U + The term Represents:

The present value of LCMS' interest tax shield is closest to:

After the recapitalization,the value of KD's levered equity is closest to:

In 2000,assuming an average dividend payout ratio of 50%,the effective tax rate for equity holders was closest to:

Galt Industries has 125 million shares outstanding and has a marginal corporate tax rate of 35%.Galt announces that it will use $75 million in excess cash to repurchase shares.Shareholders had previously assumed that Galt would retain this excess cash permanently.The amount Galt's share price can be expected to change upon this announcement is closest to:

If Rosewood had no interest expense,its net income would be closest to:

The value of Shepard Industries with leverage is closest to:

If Flagstaff currently maintains a .5 debt to equity ratio,then the value of Flagstaff as an all equity firm would be closest to:

Consider the following formula: R_wacc = R_E + R_D - R_Dτ_c The term R_Dτ_c represents:

Assume that investors hold Google stock in retirement accounts that are free from personal taxes.Also assume that Google's current pre-tax WACC is 14%.If Google were to issue sufficient debt at a pre-tax cost of 7% to give them a debt to value ratio of 0.5,then the Google's after-tax WACC would be closest to:

The interest rate tax shield for Kroger in 2005 is closest to:

Which of the following statements is FALSE?

Which of the following equations is INCORRECT?

Use the information for the question(s) below. LCMS Industries has $70 million in debt outstanding.The firm will pay only interest on this debt (the debt is perpetual) .LCMS' marginal tax rate is 35% and the firm pays a rate of 8% interest on its debt. -LCMS' annual interest tax shield is closest to: