Davenport FINC620 Final Exam/Davenport FINC620 Final Exam

Davenport FINC620 Final Exam

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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%

138 = RU + (RU - .085) × .60 × (1 − .34); .17166 = 1.396RU; RU = .12297 = 12.30 %


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