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SubmissiontoCh16-17Yoursavedsubmission...Student:朱,喜(13030433)Score:98outof102(96%)Date:06/07/201520:58Duration:*2:11:01*Workstation:172.19.166.8(2)1.Afirmhaszerodebtinitscapitalstructure.Itsoverallcostofcapitalis9%.Thefirmisconsideringanewcapitalstructurewith40%debt.Theinterestrateonthedebtwouldbe4%.Assumingthatthecorporatetaxrateis34%,whatwouldthecostofequitycapitalwiththenewcapitalstructurebe?11.2%10.3%Noneofthese.11.0%13.9%Rs=Ro+(B/S)(1-Tc)(Ro-rB)Rs=.09+(.4/.6)(1-.34)(.09-.04)=.09+.022=.112=11.2%(2)2.Theoptimalcapitalstructure:isunaffectedbychangesinthefinancialmarkets.willremainconstantovertimeunlessthefirmmakesanacquisition.ofafirmwillvaryovertimeastaxesandmarketconditionschange.willbethesameforallfirmsinthesameindustry.placesmoreemphasisontheoperationsofafirmratherthanthefinancingofafirm.(2)3.Theunleveredcostofcapitalis:thecostofcapitalforafirmwithnoequityinitscapitalstructure.equaltotheprofitmarginforafirmwithsomedebtinitscapitalstructure.thecostofcapitalforafirmwithnodebtinitscapitalstructure.theinteresttaxshieldtimespretaxnetincome.thecostofpreferredstockforafirmwithequalpartsdebtandcommonstockinitscapitalstructure.(2)4.Thepeckingorderstateshowfinancingshouldberaised.Inordertoavoidasymmetricinformationproblemsandmisinterpretationofwhethermanagementissendingasignalonsecurityovervaluation,thefirm'sfirstruleisto:alwaysissuedebtthenthemarketwon'tknowwhenmanagementthinksthesecurityisovervalued.issuenewequityfirst.Noneofthese.issuedebtfirst.financewithinternallygeneratedfunds.(2)5.Thompson&Thomsonisanallequityfirmthathas500,000sharesofstockoutstanding.Thecompanyisintheprocessofborrowing$8millionat9%interesttorepurchase200,000sharesoftheoutstandingstock.Whatisthevalueofthisfirmifyouignoretaxes?$21.2million$21.3million$21.0million$20.0million$20.8millionPricepershare=$8m÷200k=$40;[(500,000-200,000)×$40]+$8m=500,000×$40=$20m;Valueofthefirmis$20m(2)6.MMPropositionIIwithtaxes:supportstheargumentthatbusinessriskisdeterminedbythecapitalstructureemployedbyafirm.reachesthefinalconclusionthatthecapitalstructuredecisionisirrelevanttothevalueofafirm.supportstheargumentthatthecostofequitydecreasesasthedebt-equityratioincreases.hasthesamegeneralimplicationsasMMPropositionIIwithouttaxes.revealshowtheinteresttaxshieldrelatestothevalueofafirm.(2)7.Conflictsofinterestbetweenstockholdersandbondholdersareknownas:trusteecosts.financialdistresscosts.agencycosts.dealercosts.underwritingcosts.(2)8.Thecapitalstructurechosenbyafirmdoesn'treallymatterbecauseof:homemadeleverage.theinteresttaxshield.taxes.therelationshipbetweendividendsandearningspershare.theeffectsofleverageonthecostofequity.(2)9.Yourfirmhasadebt-equityratioof.75.Yourpre-taxcostofdebtis8.5%andyourrequiredreturnonassetsis15%.Whatisyourcostofequityifyouignoretaxes?12.21%19.88%16.67%21.38%11.25%Re=.15+(.15-.085)×.75=.19875=19.88%(2)10.TheModigliani-MillerPropositionIwithouttaxesstates:afirmcannotchangethetotalvalueofitsoutstandingsecuritiesbychangingitscapitalstructureproportions.Noneofthese.thedeterminationofvaluemustconsiderthetimingandriskofthecashflows.managerscanmakecorrectcorporatedecisionsthatwillsatisfyallshareholdersiftheyselectprojectsthatmaximizevalue.whennewprojectsareaddedtothefirmthefirmvalueisthesumoftheoldvalueplusthenew.(2)11.Financialleverageimpactstheperformanceofthefirmby:maintainingthesamelevelofvolatilityofthefirm'sEBIT.decreasingthevolatilityofthefirm'snetincome.decreasingthevolatilityofthefirm'sEBIT.Noneofthese.increasingthevolatilityofthefirm'snetincome.(2)12.Ifafirmissuesdebtbutwritesprotectiveandrestrictivecovenantsintotheloancontract,thenthefirm'sdebtmaybeissuedata_____interestratecomparedwithotherwisesimilardebt.equalsignificantlyhigherlowerEithersignificantlyhigherorslightlyhigherslightlyhigher(2)13.Thetaxsavingsofthefirmderivedfromthedeductibilityofinterestexpenseiscalledthe:financingumbrella.currentyield.tax-losscarryforwardsavings.interesttaxshield.depreciablebasis.(2)14.Theeffectoffinancialleveragedependsontheoperatingearningsofthecompany.Whichofthefollowingisnottrue?Belowtheindifferenceorbreak-evenpointinEBITthenon-leveredstructureissuperior.Therateofreturnonoperatingassetsisunaffectedbyleverage.Abovetheindifferenceorbreak-evenpointtheincreaseinEPSforallequitystructuresislessthandebt-equitystructures.Abovetheindifferenceorbreak-evenpointtheincreaseinEPSforallequitystructuresisgreaterthandebt-equitystructures.FinancialleverageincreasestheslopeoftheEPSline.(2)15.Jasmine'sBoutiquehas2,000bondsoutstandingwithafacevalueof$1,000eachandacouponrateof9%.Theinterestispaidsemi-annually.Whatistheamountoftheannualinteresttaxshieldifthetaxrateis34%?$60,100$62,250$60,750$58,500$61,200Annualinteresttaxshield=2,000×$1,000×.09×.34=$61,200(2)16.Theinteresttaxshieldisakeyreasonwhy:thecostofdebtisequaltothecostofequityforaleveredfirm.thevalueofanunleveredfirmisequaltothevalueofaleveredfirm.firmspreferequityfinancingoverdebtfinancing.therequiredrateofreturnonassetsriseswhendebtisaddedtothecapitalstructure.thenetcostofdebttoafirmisgenerallylessthanthecost