Module 6

Question 1

the pre tax and interest level where the earnings per share for a levered frim (one with debt) are the same as for an unlevered (zero debt) frim

Answer 1

Breakeven EBIT

Question 2

sum of the value of the firms debt and the firm’s equity

Answer 2

Value of the Firm

Question 3

zero debt

Answer 3

unlevered

Question 4

at this point there is no advantage to the firm having debt

Answer 4

breakeven

Question 5

True/False

When EBIT is relatively high, leverage is beneficial

Answer 5

True

Question 6

states that the value of the frim is not related to how the frim is financed
Cash flows of the firm do not change; therefore value doesn’t change

Answer 6

M&M Proposition I Case 1

Question 7

a firm’s cost of equity capital is a positive linear function of its capital structure

cost of equity depends on 3 factors
the required return on the firm’s assets (Ra)
the firms cost of debt (Rd)
the firms debt-equity ratio (D/E)

Answer 7

M&M Proposition II Case 1