Bond covenants encourage game playing by managers for firms in financial distress

 True

 False

Trade-off theory says the costs of financial distress offset some of debt’s tax advantages

 True

 False

The ability to use the interest tax shields impacts the debt decision

 True

 False

In perfect capital markets, as the debt-equity (D/E) ratio drops, the return on equity falls and share price is unchanged

 True

 False

Which of the following would you consider in determining your firm’s capital structure

In a world of perfect capital markets, firm value is maximized by

GM has a degree of financial leverage (DFL) of 2. If GM s EBIT decreases by 20%, then

Find the degree of financial leverage (DFL) if sales are 350,000; variable costs are $200,000; fixed costs are $80,000 and interest expense is 10,000.

Your travels take you to a distant land with only one imperfection. Corporations must pay taxes, but the interest on debt is tax deductible. An unlevered firm has a value of $700,000. A similar firm is levered with $100,000 in debt. The return on debt is 6% and the debt is perpetual. Both are in a 30% tax bracket. What is the value of the levered firm

Welcome to a world with perfect capital markets! A levered firm has 40% equity and 60% debt for its capital structure. With this capital structure, the firm has earnings per share of $3.60. This is a no growth firm (so all earnings are paid as dividends). The return on assets is 12%, and the return on debt is 8%. What is the share price?