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18Student:___________________________________________________________________________1.Themainadvantageofdebtfinancingforafirmis:I)noSECregistrationisrequiredforbondissues;II)interestexpensesaretaxdeductible;III)unleveredfirmshavehighervaluethanleveredfirms A. IonlyB. IIonlyC. IIIonlyD. IandIIIonly 2.Ifafirmpermanentlyborrows$100millionataninterestrateof8%,whatisthepresentvalueoftheinteresttaxshield?(Assumethatthemarginalcorporatetaxrateis30%.) A. $8.00millionB. $5.60millionC. $30.00millionD. $26.67million 3.Ifafirmborrows$50millionforoneyearataninterestrateof10%,whatisthepresentvalueoftheinteresttaxshield?Assumea30%marginalcorporatetaxrate. A. $1.36millionB. $1.50millionC. $1.00millionD. $4.55million 4.Inordertofindthepresentvalueofthetaxshieldsprovidedbydebt,thediscountrateusedisthe: A. costofcapital.B. costofequity.C. costofdebt.D. T-billrate. 5.Inordertocalculatethetaxshieldsprovidedbydebt,thetaxrateusedisthe: A. averagecorporatetaxrate.B. marginalcorporatetaxrate.C. averageofshareholders'equitytaxrates.D. averageofbondholders'personaltaxrates. 6.Ifafirmpermanentlyborrows$50millionataninterestrateof10%,whatisthepresentvalueoftheinteresttaxshield?Assumea30%marginalcorporatetaxrate. A. $50.0millionB. $25.0millionC. $15.0millionD. $1.5million 7.Ifafirmborrows$50millionforoneyearataninterestrateof9%,whatisthepresentvalueoftheinteresttaxshield?Assumea30%marginalcorporatetaxrate. A. $50.00millionB. $17.50millionC. $1.45millionD. $1.24million 8.Inordertocalculatethetaxshieldofinterestpaymentsforacorporation,alwaysusethe:I)averagecorporatetaxrate;II)marginalcorporatetaxrate;III)marginalrateonpersonalincometax A. IonlyB. IIonlyC. IIIonlyD. IandIIIonly 9.Ifacorporationcannotuseitsinterestpaymentsasataxshieldforaparticularyearbecauseithassufferedaloss,itisstillpossibletousethetaxshieldbecause:I)thecarry-backprovisionallowscorporationstocarrybackthelossandreceiveataxrefunduptotheamountoftaxespaidintheprevioustwoyears;II)thecarry-forwardprovisionallowscorporationstocarryforwardthelossanduseittoshieldincomeinsubsequentyears A. IonlyB. IIonlyC. IandIID. thefirmwilllosethetaxshield 10.WhydoesMMPropositionInotholdinthepresenceofcorporatetaxes? A. Leveredfirmspaylowertaxeswhencomparedwithidenticalunleveredfirms.B. Bondholdersrequirehigherratesofreturncomparedwithstockholders.C. Earningspersharearenolongerrelevantwithtaxes.D. Dividendsarenolongerrelevantwithtaxes. 11.Givencorporatetaxes,whydoesaddingdebttothecapitalstructureincreasefirmvalue?I)Extracashflowgoestothefirm'sinvestorsratherthanthetaxauthorities.II)Earningsbeforeinterestandtaxesarefullytaxedatthecorporaterate.III)Personaltaxratesarethesameasmarginalcorporatetaxrates. A. IonlyB. IIonlyC. IIIonlyD. IIandIIIonly 12.MMPropositionIwithcorporatetaxesstatesthat:I)capitalstructurecanaffectfirmvaluebyanamountthatisequaltothepresentvalueoftheinteresttaxshield;II)byraisingthedebt-to-equityratio,thefirmcanloweritstaxesandtherebyincreaseitstotalvalue;III)firmvalueismaximizedbyusinganall-equitycapitalstructure A. IonlyB. IIonlyC. IIIonlyD. IandII 13.BombayCompany'sbookandmarketvaluebalancesheetsare:(NWC=networkingcapital;LTA=longtermassets;D=debt;E=equity;V=firmvalue): AccordingtoMM'sPropositionIcorrectedfortaxes,whatwillbethechangeincompanyvalueifBombayissues$200ofequityandusesittomakeapermanentreductioninthecompany'sdebt?Assumea35%marginalcorporatetaxrate. A. +$140B. +$70C. $0D. -$70 14.MM'sPropositionIcorrectedfortheinclusionofcorporateincometaxesisexpressedas: A. VL=VU.B. VL=VU+D(1-TC).C. VL=VU+(TC)(D).D. VU=VL+(TC)(D). 15.Assumingthatbondsaresoldatafairprice,thebenefitsfromtheinteresttaxshieldgotothe: A. managersofthefirm.B. bondholdersofthefirm.C. stockholdersofthefirm.D. lawyersofthefirm. 16.Assumethemarginalcorporatetaxrateis30%.Thefirmhasnodebtinitscapitalstructure.Itisvaluedat$100million.Whatwouldbethevalueofthefirmifitissued$50millioninperpetualdebtandrepurchasedthesameamountofequity? A. $65millionB. $115millionC. $100millionD. $150million 17.Whatistherelativetaxadvantageofdebt?(TC=corporatetaxrate;TpE=personaltaxrateonequityincome;andTp=personaltaxrateoninterestincome.) A. B. C. D. 18.Whatistherelativetaxadvantageofdebt?Assumethatpersonalandcorporatetaxesaregivenby:TC=(corporatetaxrate)=35%;TpE=personaltaxrateonequityincome=30%;andTp=personaltaxrateoninterestincome=20%. A. 1.76B. 1.16C. 1.35D. 0.86 19.Foreverydollarofoperatingincomepaidoutasinterest,thebondholderrealizes: A. (1-Tp)B. (1-TpE)(1-TC)C. (1-TC)D. 1/(1-TC) 20.Foreverydollarofoperatingincomepaidoutasequityincome,theshareholderrealizes: A. (1-Tp)B. (1-TpE)(1-TC)C. (1-Tc)D. 1/(1-TP) 21.Supposethatacompanycandirect$1toeitherdebtinterestorcapitalgainsforequityinvestors.Iftherewerenopersonaltaxesoncapitalgains,whichofthefollowinginvestorswouldnotcarehowthemoneywaschanneled?(Themarginalcorporatetaxrateis35%.) A. investorspayingpersonaltaxof17.5%B. investorspayingpersonaltaxof35%C. investorspayingpersonaltaxof53%D. tax-exemptpersonalinvestors 22.InMiller'smodel,whenthequantity(1-TC)(1-T