FINC620 Equity Financing Over Debt Financing Assignment Help

Question

Question 1

The interest tax shield is a key reason why:

- the required rate of return on assets rises when debt is added to the capital structure.
- the value of an unlevered firm is equal to the value of a levered firm.
- the net cost of debt to a firm is generally less than the cost of equity.
- the cost of debt is equal to the cost of equity for a levered firm.
- 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?

- 8.83%
- 12.30%
- 13.97%
- 14.08%
- 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?

- $2,823
- $2,887
- $4,080
- $4,500
- $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?

- 6.76%
- 7.00%
- 7.25%
- 7.40%
- 7.50%

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