Chapter 17 Quiz A Student Name _________________________ Student ID ____________

________ 3. The debt-equity ratio determines the amount of _____ risk that is associated with a firm.
a. business
b. systematic
c. financial
d. unsystematic

________ 4. Which one of the following is indicative of an optimal capital structure?

a. maximum tax shield
b. minimum debt-equity ratio
c. maximum cost of capital
d. maximum firm value

_______ 5. If an individual stockholder wants to offset the leverage position of an issuing firm, he or she should:
a. increase their holdings in that stock by borrowing money.
b. increase their holdings in that stock by reducing their cash reserves.
c. reduce their holdings in that stock and borrow money.
d. reduce their holdings in that stock and lend out money.

________ 6. Your firm has 10,000 bonds outstanding with a face value of $1,000 each. These bonds have an 8
percent
coupon and pay interest semiannually. The current market quote on these bonds is 98. What is the
amount of
the annual interest tax shield on these bonds if the tax rate is 34 percent?
a. $272,000
b. $314,815
c. $528,000
d. $800,000

________ 7. Big Bill’s Yachts has a debt-equity ratio of .75. The pre-tax cost of debt is 8 percent and the
unlevered cost of
capital is 13 percent. What is the cost of equity if the tax rate is 35 percent?
a. 13.00 percent b. 15.44 percent c. 16.37 percent d. 17.33 percent

________ 8. Sally’s has debt of $12,000 and equity of $18,000. The cost of debt is 8 percent and the cost of
equity is 13
percent. The leveraged value of the firm is $10,600 and the tax rate is 34 percent. What is the firm’s
weighted
average cost of capital?
a. 9.91 percent b. 10.03 percent c. 10.26 percent d. 11.00 percent

________ 9. You are considering two different capital structures. The first is all equity. The second is a
combination of
debt and equity. The all equity option would consist of 15,000 shares of stock. The debt-equity
option would
consist of 8,500 shares of stock plus $120,000 of debt with an interest rate of 8 percent. What is the
break-
even level of earnings before interest and taxes between these two options? Ignore taxes.
a. $22,153.85 b. $23,909.18 c. $24,006.16 d. $24,244.19

________ 10. J&J, Inc. is an all equity firm that has 250,000 shares of stock outstanding. The company is currently
 negotiating a $300,000 loan at 7 percent interest. The loan proceeds will be used to repurchased
100,000
shares of the outstanding stock. What is the value of J&J, Inc. if you ignore taxes?
a. $450,000 b. $750,000 c. $900,000 d. $1,050,000