Flipping Book Publisher Corporate Finance

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Corporate finance final Problem set 6 Flashcards. The firms business risk is largely determined by the financial characteristics of its industry TrueFalse. Financial risk refers to the extra risk stockholders bear as a result of the use of debt as compared with the risk they would bear if no debt were used. TFFirm A has a higher degree of business risk than Firm B. Firm A can offset this by using less financial leverage. Therefore, the variability of both firms expectd EBITs could actually be identical. TrueFalse. Financial leverage effects both EPS and EBIT, while operating leverage only affects EBIT. TFThe trade off theory tells us that the capital structure decision involves a tradeoff between the costs of debt financing and the benefits of debt financing. TrueFalse. If Miller and Modigliani has considered the cost of bankruptcy, it is unlikely that they would have concluded that 1. TrueFalse. Which of the following statements is most correct A Since debt financing raises the firms financial risk, raising a companys debt ratio will always increase the companys WACC. B Since debt financing is cheaper than equity financing, raising a companys debt ratio will always reducet the companys WACCC Increasing a companys debt ratio will typically reduce the marginal cost of boht debt and equity financing however, it still may raise the companys WACCD Statements A and C are correct. E None of the statements above are correct. The Economist offers authoritative insight and opinion on international news, politics, business, finance, science, technology and the connections between them. Agent Amy Tompkins. Alison Achesons eighth book, 19 Things A Book Of Lists for Me, will be published in Fall 2014. Her works are for all ages, from picture books. The latest travel information, deals, guides and reviews from USA TODAY Travel. Ctrip Recognized as Most Honored Company by Institutional Investor in the 2017 AllAsia Executive Team Rankings. Which of the following events is likely to encourage a company to raise its target debt ratio A An increase in the corporate tax rate. B An increase in the personal tax rate. Flipping Book Publisher Corporate Finance' title='Flipping Book Publisher Corporate Finance' />Start studying Corporate finance final Problem set 6. Learn vocabulary, terms, and more with flashcards, games, and other study tools. C An increase in the companys operating leverage. D Statements A and C are correct. E All of the above are correct. Which of the following statements is falseAs a firm increases its operating leverage for a given quantity of output, this A changes its operating cost structure. B increases its business risk. C increases the standard deviation of its EBITD Increases the variability in earnings per share. E decreases its financial leverage. Company A and Company B have the same total assets, operating income EBIT, tax rate, interest rate cost of debt, RD, and business risk. Company A, however, has a much higher debt ratio than Company B. Company As basic earning power BEP exceeds its cost of debt financing RD. Roblox Download For Ipad. Which of the following statements is most correct A Company A has a higher return on assets ROA than company B. B Company A has a higher times interest earned TIE ratio than Company B. C Company A has a higher return on equity ROE than Company B, and its risk, as measure by the standard deviation of ROE, is also higher than Company Bs. D Statements B and C are correct. E All of the above statements are correct. Elephant Books sells paperback books for 7 each. The variable cost per book is 5. At current annual sales of 2. It is estimated that if the authors royalties are reduced, the variable cost per bookw ill drop by 1. Assume authors royaties are reduced and sales remain constant how much more mone can the publisher put into advertising a fixed cost and still break even A 6. B 4. C 3. 33,3. 33. D 2. E None of the Above. A consultant has collected the following information regarding Yong Publishing Total assets 3,0. Tax rate 4. 0Operating Income EBIT 8. Debt Ratio 0Interest expense 0 million. WACC 1. 0Net income 4. MB ratio 1. 0. 0Share Price 3. EPS DPS 3. 2. The company has no growth opportunities so the company pays out all ofts earnings as dividends EPS DPS. THe consultatnt believes that if the compnay m oves to a capital structure fianncend with 2. If the company makes this change, what would be the total market value of the firm A 3. B 3. C 4 billion. D 4. E 4. 8 billion. Dolby Electronics currently has no debt. Its operating income is 2. It pays out all of its net income as dividends and has a zero growth rate. The current stock price is 4. If it moves to a capital structure that has 4. What would its stock price be if it changes to the new capital structure A 4. B 4. 8 C 5. D 5. 4E 6. Simon Software Co. Right now, Simon has a capital structure that consists of 2. ITS DS ratio is. The risk free rate is 6 percent and the market risk premium, RM RF, is 5. CAPMlt is 1. 2 percent and its tax rate is 4. What would Simons estimated cost of equity be if it weree to change its capital structure to 5. A 1. 4. 3. 5B 3. C 1. D 1. E 1. 3. 6. 4What is the net effect on the WACC of increasing debtWhat are the indirect costs of increasing debt NOPAT goes down due to lost customers and drop in productivity. Require more net operating working capital E. What are the two ways debt affects managers of a firmManagers are less likely to waste FCF on goodies for themselves. Managers may become too risk averse. The risk a firms shareholders would face even if the firm has no debt. Focuses on operating income, or EBITThe additional risk placed on shareholders as a result of using debt. What incomes do business risk and financial risk focus on EBIT and financial risk focuses on net income. What are the business risk factors Uncertainty about demand, uncertainty about output prices, uncertaintly about input costs, product and other types of liability, degree of operating leverage. What is operating leverage EBIT caused by a change in sales. The higher the proportion of fixed costs within a firms overall cost, the greater the operating leverage. What are the three MM versionsZero taxes, Corporate Taxes, Corporate and Personal Taxes. What are the three pieces of empirical evidence regarding capital structure theories1 debt adds about. Bankruptcies are costly costs can be up to 1. Firms dont make quick corrections when stock price changes cause their debt ratios to change doesnt support trade off model. After big stock price run ups, debt ratio falls, but firms tend to issue equity instead of debt. How is this inconsistent or consistent with the 3 capital structure theories that arent MMConsistent with windows of opportunity. In the equation P N0 S D D0, what does each term mean P stock price before the repurchase but after the cap structure change N0 number of shares before the repurchase. S value of total equity after repurchase. D debt after repurchase. D0 Debt before repurchase. What are the 6 MM assumptions No transaction costs. No restrictions on short sales. Individuals can borrow at the same rate as corporations. No bankruptcy costs. EBIT is not affected by the use of debt. No information assymetryWhat is the effect of adding corporate tax to MMs world Allows interest to be deducted, which reduces taxes paid by levered firms. More CF goes to investors. What is the tax shield equation How do personal taxes affect corporate debt They lessen the advantage of corporate debt. Income from bonds taxed at 3. What do the terms mean in the equation VL VU 1 1 TC1 Ts1 TD DTS Personal tax rate on stock income. TD Personal tax rate on debt income. Tc corporate tax rate. What is the trade off theoryAt low leverage levels, tax benefits outweigh bankruptcy costs. At high leverage levels, bankruptcy costs outweigh tax benefits. Metal Gear Solid 3D Model. AN optimal cap structure exists that balances these costs and benefits. Why do MM support the dividend irrelevance theory Are stock splits interpreted positively or negativel.