Question 1

Miller model begins with the MM model without corporate taxes and then adds personal taxes.

Accepted Answer

A) True 
 B)False

Question 2

The total value (debt plus equity)  of Wilson Dover Inc. is $500 million and the face value of its 1-year coupon debt is $200 million. The volatility ()  of Wilson DOver's total value is 0.60, and the risk-free rate is 5%. Assume that N(d1)  = 0.9720 and N(d2)  = 0.9050.
-is the value (in millions)  of Wilson Dover's equity if it is viewed as an option?

Accepted Answer

A)   $228.77
B)   $254.19
C)   $282.43
D)   $313.81
E)   $345.19F) B) and D)
G) A) and E)

Question 3

MM model is the same as the Miller model, but with zero corporate taxes.

Accepted Answer

A) True 
 B)False

Question 4

a firm has risky debt, its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the equity.

Accepted Answer

A) True 
 B)False

Question 5

Miller model begins with the MM model with taxes and then adds personal taxes.

Accepted Answer

A) True 
 B)False

Question 6

the MM extension with growth, the appropriate discount rate for the tax shield is the after-tax cost of debt.

Accepted Answer

A) True 
 B)False  False

Question 7

The total value (debt plus equity)  of Wilson Dover Inc. is $500 million and the face value of its 1-year coupon debt is $200 million. The volatility ()  of Wilson DOver's total value is 0.60, and the risk-free rate is 5%. Assume that N(d1)  = 0.9720 and N(d2)  = 0.9050.
-is the yield on Wilson Dover's debt?

Accepted Answer

A)   6.04%
B)   6.36%
C)   6.70%
D)   7.05%
E)   7.42%F) B) and C)
G) C) and D) E

Question 8

major contribution of the Miller model is that it demonstrates that

Accepted Answer

A)   personal taxes decrease the value of using corporate debt.
B)   financial distress and agency costs reduce the value of using corporate debt.
C)   equity costs increase with financial leverage.
D)   debt costs increase with financial leverage.
E)   personal taxes increase the value of using corporate debt.F) B) and D)
G) C) and D)

Question 9

Which of the following statements concerning capital structure theory is NOT CORRECT?

Accepted Answer

A)   Under MM with zero taxes, financial leverage has no effect on a firm's value.
B)   Under MM with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt.
C)   Under MM with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing.
D)   Under MM with corporate taxes, the effect of business risk is automatically incorporated because rsL is a function of rsU.
E)   The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt.F) C) and D)
G) B) and E)

Question 10

MM model with corporate taxes is the same as the Miller model, but with zero personal taxes.

Accepted Answer

A) True 
 B)False

Question 11

According to the MM extension with growth, what is Kitto's value of equity?

Accepted Answer

A)   $1,492,000
B)   $1,529,300
C)   $1,567,533
D)   $1,606,721
E)   $1,646,889F) C) and E)
G) C) and D)

Question 12

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Accepted Answer

A)   The value of a growing tax shield is greater than the value of a constant tax shield.
B)   For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax)  assumptions.
C)   For a given D/S, the WACC is greater than the WACC under MM's original (with tax)  assumptions.
D)   The total value of the firm is independent of the amount of debt it uses.
E)   The tax shields should be discounted at the unlevered cost of equity.F) A) and E)
G) A) and D)

Question 13

the MM extension with growth, the appropriate discount rate for the tax shield is the WACC.

Accepted Answer

A) True 
 B)False

Question 14

a firm has risky debt, its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.

Accepted Answer

A) True 
 B)False  True

Question 15

the MM extension with growth, the appropriate discount rate for the tax shield is the unlevered cost of equity.

Accepted Answer

A) True 
 B)False

Question 16

showed that in a world without taxes, a firm's value is not affected by its capital structure.

Accepted Answer

A) True 
 B)False

Question 17

According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

Accepted Answer

A) True 
 B)False

Question 18

a world with no taxes, MM show that a firm's capital structure does not affect the firm's value However, when taxes are considered, MM show a positive relationship between debt and value, i.e., its value rises as its debt is increased.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Accepted Answer

A)   The value of a growing tax shield is greater than the value of a constant tax shield.
B)   For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax)  assumptions.
C)   For a given D/S, the WACC is less than the WACC under MM's original (with tax)  assumptions.
D)   The total value of the firm increases with the amount of debt.
E)   The tax shields should be discounted at the unlevered cost of equity.F) A) and E)
G) A) and C)

Question 20

market value of Firm L's debt is $200,000 and its yield is 9% The firm's equity has a market value of $300,000, its earnings are growing at a 5% rate, and its tax rate is 40% A similar firm with no debt has a cost of equity of 12% Under the MM extension with growth, what would Firm L's total value be if it had no debt?

Accepted Answer

A)   $358,421
B)   $377,286
C)   $397,143
D)   $417,000
E)   $437,850F) A) and C)
G) B) and C)

Exam 16: Cap Structure II

Miller model begins with the MM model without corporate taxes and then adds personal taxes.

Correct Answer
verified

Correct Answer
verified

MM model is the same as the Miller model, but with zero corporate taxes.

Correct Answer
verified

a firm has risky debt, its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the equity.

Correct Answer
verified

Miller model begins with the MM model with taxes and then adds personal taxes.

Correct Answer
verified

the MM extension with growth, the appropriate discount rate for the tax shield is the after-tax cost of debt.

Correct Answer
verified
False

Correct Answer
verified
E

major contribution of the Miller model is that it demonstrates that

Correct Answer
verified

Which of the following statements concerning capital structure theory is NOT CORRECT?

Correct Answer
verified

MM model with corporate taxes is the same as the Miller model, but with zero personal taxes.

Correct Answer
verified

According to the MM extension with growth, what is Kitto's value of equity?

Correct Answer
verified

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Correct Answer
verified

the MM extension with growth, the appropriate discount rate for the tax shield is the WACC.

Correct Answer
verified

a firm has risky debt, its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.

Correct Answer
verified
True

the MM extension with growth, the appropriate discount rate for the tax shield is the unlevered cost of equity.

Correct Answer
verified

showed that in a world without taxes, a firm's value is not affected by its capital structure.

Correct Answer
verified

According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

Correct Answer
verified

a world with no taxes, MM show that a firm's capital structure does not affect the firm's value However, when taxes are considered, MM show a positive relationship between debt and value, i.e., its value rises as its debt is increased.

Correct Answer
verified

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Correct Answer
verified

Correct Answer
verified

Exam 16: Cap Structure II

Miller model begins with the MM model without corporate taxes and then adds personal taxes.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

MM model is the same as the Miller model, but with zero corporate taxes.

Correct AnswerverifiedShow Answer

a firm has risky debt, its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the equity.

Correct AnswerverifiedShow Answer

Miller model begins with the MM model with taxes and then adds personal taxes.

Correct AnswerverifiedShow Answer

the MM extension with growth, the appropriate discount rate for the tax shield is the after-tax cost of debt.

Correct AnswerverifiedFalse

Correct AnswerverifiedE

major contribution of the Miller model is that it demonstrates that

Correct AnswerverifiedShow Answer

Which of the following statements concerning capital structure theory is NOT CORRECT?

Correct AnswerverifiedShow Answer

MM model with corporate taxes is the same as the Miller model, but with zero personal taxes.

Correct AnswerverifiedShow Answer

According to the MM extension with growth, what is Kitto's value of equity?

Correct AnswerverifiedShow Answer

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Correct AnswerverifiedShow Answer

the MM extension with growth, the appropriate discount rate for the tax shield is the WACC.

Correct AnswerverifiedShow Answer

a firm has risky debt, its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.

Correct AnswerverifiedTrue

the MM extension with growth, the appropriate discount rate for the tax shield is the unlevered cost of equity.

Correct AnswerverifiedShow Answer

showed that in a world without taxes, a firm's value is not affected by its capital structure.

Correct AnswerverifiedShow Answer

According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

Correct AnswerverifiedShow Answer

a world with no taxes, MM show that a firm's capital structure does not affect the firm's value However, when taxes are considered, MM show a positive relationship between debt and value, i.e., its value rises as its debt is increased.

Correct AnswerverifiedShow Answer

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
False

Correct Answer
verified
E

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
True

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified