Question 1

Which of the following statements concerning the compressed adjusted present value (APV) model 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 in the compressed APV model is greater than the levered cost of equity under MM's original (with tax) assumptions.
C)   For a given D/S,the WACC in the compressed APV model 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) B) and E)
G) A) and B)

Question 2

Using the data for Sallie's Sandwiches and the compressed adjusted present value model,what is the appropriate rate for use in discounting the free cash flows and the interest tax savings?

Accepted Answer

A)   12.0%
B)   13.9%
C)   14.4%
D)   16.0%
E)   16.9%F) A) and E)
G) A) and D)

Question 3

Refer to data for Kitto Electronics.According to the compressed adjusted present value model,what is Kitto's unlevered value?

Accepted Answer

A)   $1,296,000
B)   $1,440,000
C)   $1,600,000
D)   $1,760,000
E)   $1,936,000F) All of the above
G) A) and E)

Question 4

Refer to data for Kitto Electronics.Using the compressed adjusted present value model,what is the value of Kitto's tax shield?

Accepted Answer

A)   $156,385
B)   $164,616
C)   $173,280
D)   $182,400
E)   $192,000F) D) and E)
G) None of the above

Question 5

A local firm has debt worth $200,000,with a yield of 9%,and equity worth $300,000.It is growing at a 5% rate,and its tax rate is 40%.A similar firm with no debt has a cost of equity of 12%.Using the compressed adjusted present value model,what is the value of your firm's tax shield,i.e. ,how much value does the use of debt add?

Accepted Answer

A)   $92,571
B)   $102,857
C)   $113,143
D)   $124,457
E)   $136,903F) B) and C)
G) A) and B)

Question 6

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT?

Accepted Answer

A)   The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt.
B)   The horizon value is calculated by discounting the expected earnings at the WACC.
C)   The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC.
D)   The horizon value must always be more than 20 years in the future.
E)   The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the levered cost of equity.F) A) and C)
G) A) and E)

Question 7

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 8

Refer to data for Kitto Electronics.Using the compressed adjusted present value model,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) A) and B)
G) B) and E)

Question 9

In the compressed adjusted present value model,the appropriate discount rate for the tax shield is the after-tax cost of debt.

Accepted Answer

A) True 
 B)False

Question 10

MM showed that in a world with taxes,a firm's optimal capital structure would be almost 100% debt.

Accepted Answer

A) True 
 B)False

Question 11

Refer to data for Glassmaker Corporation.Using the compressed adjusted present value model,what will Glassmaker's value of equity be if it successfully implements its planned changes in operations and capital structure? (Round your answer to the closest thousand dollars. )

Accepted Answer

A)   $16,019,000
B)   $17,111,000
C)   $18,916,000
D)   $22,111,000
E)   $22,916,000F) A) and B)
G) A) and C) B

Question 12

In the compressed adjusted present value model,the appropriate discount rate for the tax shield is the WACC.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements concerning the compressed adjusted present value (APV) model 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 using the compressed APV model is greater than the levered cost of equity under MM's original (with tax) assumptions.
C)   For a given D/S,the WACC in the compressed APV model 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) B) and D)
G) A) and B) C

Question 14

The 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 rate of 5%,and its tax rate is 40%.A similar firm with no debt has a cost of equity of 12%.Using the compressed adjusted present value model,what is Firm L's cost of equity?

Accepted Answer

A)   11.4%
B)   12.0%
C)   12.6%
D)   13.3%
E)   14.0%F) D) and E)
G) C) and D)

Question 15

MM 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 16

In the compressed adjusted present value model,the appropriate discount rate for the tax shield is the unlevered cost of equity.

Accepted Answer

A) True 
 B)False

Question 17

Refer to data for Glassmaker Corporation.According to the compressed adjusted present value model,what discount rate should you use to discount Glassmaker's free cash flows and interest tax savings?

Accepted Answer

A)   10.01%
B)   10.06%
C)   11.29%
D)   11.44%
E)   13.49%F) B) and D)
G) B) and E)

Question 18

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT?

Accepted Answer

A)   The value of equity is calculated by discounting the horizon value,the tax shields,and the free cash flows at the cost of equity.
B)   The value of operations is calculated by discounting the horizon value,the tax shields,and the free cash flows before the horizon date at the unlevered cost of equity.
C)   The value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity.
D)   The CAPV approach stands for the accounting pre-valuation approach.
E)   The value of operations is calculated by discounting the horizon value,the tax shields,and the free cash flows at the cost of equity.F) A) and B)
G) C) and D)

Question 19

Which of the following statements concerning the compressed adjusted present value (APV) model 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 in the compressed APV model than the levered cost of equity under MM's original (with tax) assumptions.
C)   For a given D/S,the WACC is greater in the compressed APV model 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 cost of debt.F) A) and B)
G) All of the above

Question 20

In 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  True

Exam 21: Dynamic Capital Structures and Corporate Valuation

Which of the following statements concerning the compressed adjusted present value (APV) model is NOT CORRECT?

Correct Answer
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Using the data for Sallie's Sandwiches and the compressed adjusted present value model,what is the appropriate rate for use in discounting the free cash flows and the interest tax savings?

Correct Answer
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Refer to data for Kitto Electronics.According to the compressed adjusted present value model,what is Kitto's unlevered value?

Correct Answer
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Refer to data for Kitto Electronics.Using the compressed adjusted present value model,what is the value of Kitto's tax shield?

Correct Answer
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Correct Answer
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Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT?

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

Correct Answer
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Refer to data for Kitto Electronics.Using the compressed adjusted present value model,what is Kitto's value of equity?

Correct Answer
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In the compressed adjusted present value model,the appropriate discount rate for the tax shield is the after-tax cost of debt.

Correct Answer
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MM showed that in a world with taxes,a firm's optimal capital structure would be almost 100% debt.

Correct Answer
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Refer to data for Glassmaker Corporation.Using the compressed adjusted present value model,what will Glassmaker's value of equity be if it successfully implements its planned changes in operations and capital structure? (Round your answer to the closest thousand dollars. )

Correct Answer
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B

In the compressed adjusted present value model,the appropriate discount rate for the tax shield is the WACC.

Correct Answer
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Which of the following statements concerning the compressed adjusted present value (APV) model is NOT CORRECT?

Correct Answer
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C

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

Correct Answer
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In the compressed adjusted present value model,the appropriate discount rate for the tax shield is the unlevered cost of equity.

Correct Answer
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Refer to data for Glassmaker Corporation.According to the compressed adjusted present value model,what discount rate should you use to discount Glassmaker's free cash flows and interest tax savings?

Correct Answer
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Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT?

Correct Answer
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Which of the following statements concerning the compressed adjusted present value (APV) model is NOT CORRECT?

Correct Answer
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In 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
True

Exam 21: Dynamic Capital Structures and Corporate Valuation

Which of the following statements concerning the compressed adjusted present value (APV) model is NOT CORRECT?

Correct AnswerverifiedShow Answer

Using the data for Sallie's Sandwiches and the compressed adjusted present value model,what is the appropriate rate for use in discounting the free cash flows and the interest tax savings?

Correct AnswerverifiedShow Answer

Refer to data for Kitto Electronics.According to the compressed adjusted present value model,what is Kitto's unlevered value?

Correct AnswerverifiedShow Answer

Refer to data for Kitto Electronics.Using the compressed adjusted present value model,what is the value of Kitto's tax shield?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT?

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

Refer to data for Kitto Electronics.Using the compressed adjusted present value model,what is Kitto's value of equity?

Correct AnswerverifiedShow Answer

In the compressed adjusted present value model,the appropriate discount rate for the tax shield is the after-tax cost of debt.

Correct AnswerverifiedShow Answer

MM showed that in a world with taxes,a firm's optimal capital structure would be almost 100% debt.

Correct AnswerverifiedShow Answer

Refer to data for Glassmaker Corporation.Using the compressed adjusted present value model,what will Glassmaker's value of equity be if it successfully implements its planned changes in operations and capital structure? (Round your answer to the closest thousand dollars. )

Correct AnswerverifiedB

In the compressed adjusted present value model,the appropriate discount rate for the tax shield is the WACC.

Correct AnswerverifiedShow Answer

Which of the following statements concerning the compressed adjusted present value (APV) model is NOT CORRECT?

Correct AnswerverifiedC

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In the compressed adjusted present value model,the appropriate discount rate for the tax shield is the unlevered cost of equity.

Correct AnswerverifiedShow Answer

Refer to data for Glassmaker Corporation.According to the compressed adjusted present value model,what discount rate should you use to discount Glassmaker's free cash flows and interest tax savings?

Correct AnswerverifiedShow Answer

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements concerning the compressed adjusted present value (APV) model is NOT CORRECT?

Correct AnswerverifiedShow Answer

In 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 AnswerverifiedTrue

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B

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C

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True