Davenport FINC620 Final Exam/Davenport FINC620 Final Exam/Davenport FINC620 Final Exam

  
Question
Question 1
The interest tax shield is a key reason why:
A. the required rate of return on assets rises when debt is added to the capital structure.
B. the value of an unlevered firm is equal to the value of a levered firm.
C. the net cost of debt to a firm is generally less than the cost of equity.
D. the cost of debt is equal to the cost of equity for a levered firm.
E. firms prefer equity financing over debt financing.
Question 2
Rosita’s has a cost of equity of 13.8% and a pre-tax cost of debt of 8.5%. The debt-equity ratio is .60 and the tax rate is .34. What is Rosita’s unlevered cost of capital?
A. 8.83%
B. 12.30%
C. 13.97%
D. 14.08%
E. 14.60%
  
Question 3
Juanita’s Steak House has $12,000 of debt outstanding that is selling at par and has a coupon rate of 8%. The tax rate is 34%. What is the present value of the tax shield?
A. $2,823
B. $2,887
C. $4,080
D. $4,500
E. $4,633
  
Question 4
The Backwoods Lumber Co. has a debt-equity ratio of .80. The firm’s required return on assets is 12% and its cost of equity is 15.68%. What is the pre-tax cost of debt based on MM Proposition II with no taxes?
A. 6.76%
B. 7.00%
C. 7.25%
D. 7.40%
E. 7.50%

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