A company has net income of $20,000 and a tax rate of 35%. Its total debt is $25,000 with principal payments of $5,000 due at the end of each year and an annual interest rate of 8%. What will be the company’s interest tax shield in the upcoming year?
a. $8,750
b. $700
c. $9,450
d. $2,450
Which of the following is correct?
1.Tax shields make debt more attractive, all else equal
2. A firm’s debt ratio falls when it uses excess cash to pay dividends.
3. The cost of equity is low for firms that pay no dividens, all else equal.
4. Bankruptcy costs decrease the benefits of debt financing all else equal.
a) 1 and 4
b)1, 2 and 4
c) 1, 3 and 4
d) 1, 2, 3 and 4
Which of the following ratios appears on a common-size balance sheet?
I. Debt to asset ratio
II. Net working capital to total assets
III. Net profit margin
a. I, II, III
b. I only
c. I and II
d. III only
Share repurchases and dividend payouts are most likely to differ in their
a. effects on a firm’s capital structure
b. effects on corporate taxes
c. effects on corporate cash flow
d. effects on shareholders’ personal taxes
Enterprise Free Cash Flows should include
I. Capital Expenditures
II. Financing Costs
III. Taxes
IV. Working capital requirements
a. I and IV
b. I, II, and IV
c. I, III, and IV
d. I, II, III, IV
Which of the following are sources of cash in a statement of sources and uses?
I. Reduction in the cash account
II. Reduction of long-term debt
III. Payment of dividends
IV. Collection of accounts receivable
a. IV only
b. II and III
c. I and III
d. I and IV
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