2. As a firm's debt/equity ratio approaches zero, the firm's expected return on equity approaches:
1. the expected return on assets.
2. its maximum.
3. zero.
4. the expected return on debt.
3. The Boat Company has a capital structure of 30 percent riskless debt and 70 percent equity. The assumed tax rate is 23 percent. If the asset beta is .9, what is the equity beta?
1. .63
2. 1.20
3. .41
4. 1.26
5. 1.49
4. Reena Industries has $138,000 of perpetual debt outstanding that is selling at par and has a coupon rate of 7 percent. If the tax rate is 21 percent, what is the present value of the tax shield on debt?
1. $31,010
2. $3,284
3. $28,412
4. $28,980
5. $2,029
5. In a world with taxes and financial distress, when a firm is operating with the optimal capital structure:
(I) the debt-equity ratio will also be optimal.
(II) the weighted average cost of capital will be at its minimal point.
(III) the required return on assets will be at its maximum point.
(IV) the increased benefit from additional debt is equal to the increased bankruptcy costs of that debt.
1. II, III, and IV only
2. I, II, and IV only
3. I and II only
4. I and IV only
5. II and III only
6. Which of the following would be indicative of inefficient markets?
1. Immediate and accurate response
2. Delayed response
3. Overreaction with reversion and delayed response
4. Overreaction and reversion
5. Immediate and accurate response with a zero NPV
