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Chapter 17 - Capital Structure: Limits to the Use of Debt

47. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?

Corporate tax rate: 34%

Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 0% A. $0.175 B. $0.472 C. $0.528 D. $0.825

E. None of the above

48. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?

Corporate tax rate: 34%

Personal tax rate on income from bonds: 50% Personal tax rate on income from stocks: 10% A. $-0.050 B. $-0.188 C. $0.188 D. $0.633

E. None of the above

49. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?

Corporate tax rate: 34%

Personal tax rate on income from bonds: 10% Personal tax rate on income from stocks: 50% A. $-0.050 B. $-0.188 C. $0.367 D. $0.633

E. None of the above

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Chapter 17 - Capital Structure: Limits to the Use of Debt

50. The Aggie Company has EBIT of $70,000 and market value debt of $100,000 outstanding with a 9% coupon rate. The cost of equity for an all equity firm would be 14%. Aggie has a 35% corporate tax rate. Investors face a 20% tax rate on debt receipts and a 15% rate on equity. Determine the value of Aggie. A. $120,000 B. $162,948 C. $258,537 D. $263,080 E. $355,938

51. Suppose a Miller equilibrium exists with a corporate tax rate of 30% and a personal tax rate on income from bonds of 35%. What is the personal tax rate on income from stocks? A. 0.0% B. 7.1% C. 10.05% D. 45.5%

E. None of the above

52. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?

Corporate tax rate: 40%

Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 30% A. $-0.475 B. $0.475 C. $0.525 D. $0.633

E. None of the above

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Chapter 17 - Capital Structure: Limits to the Use of Debt

53. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?

Corporate tax rate: 34%

Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 50% A. $-0.050 B. $-0.188 C. $0.367 D. $0.588

E. None of the above

54. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?

Corporate tax rate: 34%

Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 30% A. $-0.050 B. $0.006 C. $0.246 D. $0.340 E. $0.423

55. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?

Corporate tax rate: 30%

Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 0% A. $0.125 B. $0.472 C. $0.528 D. $0.825

E. None of the above

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Chapter 17 - Capital Structure: Limits to the Use of Debt

56. Holly Berry Incorporated will earn $40 in one year if it does well. The debtholders are promised payments of $25 in one year if the firm does well. If the firm does poorly, expected earnings in one year will be $20 and the repayment will be $15 because of the dead weight cost of bankruptcy. The probability of the firm performing poorly or well is 50%. If bondholders are fully aware of these costs what will they pay for the debt? The interest rate on the bonds is 8%. A. $18.52 B. $30.00 C. $32.55 D. $35.75 E. $37.04

57. Holly Berry Incorporated debtholders are promised payments of $25 if the firm does well, but will receive only $20 if the firm does poorly. Bondholders are willing to pay $15. The promised return to the bondholders is approximately: A. 5.65% B. 45.65% C. 50.00% D. 66.67% E. 100.00%

58. An investment is available that pays a tax-free 7%. The corporate tax rate is 40%. Ignoring risk, what is the pre-tax return on taxable bonds? A. 4.20% B. 7.00% C. 7.47% D. 11.67%

E. None of the above

Essay Questions

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