7. Which one of these parties holds a marketable claim on a firm's assets?
1. Internal Revenue Service
2. Bondholders
3. State tax authorities
4. Employees
5. Customers
8. The free cash flow hypothesis states that:
1. issuing debt requires payments to creditors thereby reducing the ability of managers to waste resources.
2. firms with greater free cash flow should issue new equity to help minimize the wasting of resources by managers.
3. firms with higher levels of free cash flow should reward their managers with bonuses.
4. firms with greater free cash flow will pay higher dividends thereby reducing the risk of financial distress.
5. firms should reduce their debt levels as their level of free cash flow rises.
9. The flow-to-equity approach to capital budgeting is a three step process of:
1. calculating the levered cash flow after interest expense and taxes, the cost of equity capital for a levered firm, and then discounting the levered cash flows at the risk free rate.
2. calculating the levered cash flow, the cost of equity capital for a levered firm, then adding the interest expense when the cash flows are discounted.
3. calculating the levered cash flow after interest expense and taxes, the cost of equity capital for a levered firm, and then discounting the levered cash flows by the cost of equity capital.
4. calculating the unlevered cash flow, the cost of equity capital for a levered firm, and then discounting the unlevered cash flows.
10. The "trade-off theory" of capital structure suggests that:
1. firms with higher risk should use less debt.
2. firms should use debt to overcome high par values of stock.
3. firms should use 50% debt and 50% equity.
4. firms add leverage whenever interest rates are low.
11. CT Stores has debt with a book value of $325,000 and a market value of $319,000. The firm's equity has a book value of $526,000 and a market value of $684,000. The tax rate is 21 percent and the cost of capital is 11.2 percent. What is the market value of this firm based on MM Proposition I without taxes?
1. $984,300
2. $769,750
3. $923,250
4. $851,000
5. $1,003,000
