Answer Happy

Ned's Decorations Inc. (NDI) operates in a country that has no
corporate taxes and it has an annual operating income (EBIT) of
$600,000 in perpetuity. The company is currently 100 percent equity
financed and its shareholders have a current required rate of
return of 10 percent. NDI is considering a major financial
restructuring where it will issue $2 million of 6.0 percent debt at
par value and use the proceeds to buy back stock. Assuming
Modigliani and Miller's Proposition II applies, the value of NDI
before the restructuring is closest to:
Group of answer choices
$10,000,000
$7,500,000
$6,000,000
According to Modigliani and Miller Proposition II with corporate
taxes and assuming that interest paid on debt is tax deductible,
the optimal capital structure is most
likely achieved:
Group of answer choices
at any mix of equity and debt financing.
only when debt approaches 100 percent of the total capital
structure.
at the point where the benefits of using cheaper after‐tax debt
are exactly offset by the costs of financial distress.
Pomona Enterprises has a weighted average cost of capital of
12.1 percent. After it paid off one of its bond issues, its
weighted average cost of capital (WACC) dropped to 11.6 percent.
This outcome is most likely due to Pomona
Enterprises having:
Group of answer choices
too little debt both before and after the debt issue's
retirement.
paid off debt that was floating‐rate debt, which leaves only
fixed‐rate debt in its financing.
a debt‐to‐equity ratio before the debt issue's retirement that
was higher than the optimal debt‐to‐equity ratio.