Question 1

Which of the following would be considered part of a firm's business risk?

Accepted Answer

A) The firm's default risk 
B) The risk that some of the firm's bonds will be repaid prior to their maturities 
C) The general liability that is associated with the product line the firm manufactures and sells 
D) Risk of loss due to currency fluctuations 
E) Interest rate reinvestment risk 
A) The firm's default risk 
B) The risk that some of the firm's bonds will be repaid prior to their maturities 
C) The general liability that is associated with the product line the firm manufactures and sells 
D) Risk of loss due to currency fluctuations 
E) Interest rate reinvestment risk

Question 2

Quick Launch Rocket Company, expects its sales to increase by 50 percent in the coming year. The firm's current earnings per share (EPS) is $3.25. Its degree of operating leverage is 1.6 and its degree of financial leverage is 2.1. What is the firm's projected EPS for the coming year?

Accepted Answer

A) $3.25 
B) $5.46 
C) $10.92 
D) $8.71 
E) $19.63 
A) $3.25 
B) $5.46 
C) $10.92 
D) $8.71 
E) $19.63

Question 3

According to the signaling theory that has been proposed to explain differences in firms' capital structures, which of the following actions by the management is taken as a signal that a firm's future prospects are not bright (i.e., not good)? (Assume that the firm has multiple financing alternatives.)

Accepted Answer

A) A small company raises new capital by issuing of new shares of common stock. 
B) A mature company raises new capital by issuing of new shares of common stock. 
C) A small company maintains a reserve borrowing capacity that can be used if good investments are discovered in the future. 
D) A mature company maintains a reserve borrowing capacity that can be used if good investments are discovered in the future. 
E) A mature company raises new capital by issuing debt beyond the amount that is indicated by its normal target capital structure. 
A) A small company raises new capital by issuing of new shares of common stock. 
B) A mature company raises new capital by issuing of new shares of common stock. 
C) A small company maintains a reserve borrowing capacity that can be used if good investments are discovered in the future. 
D) A mature company maintains a reserve borrowing capacity that can be used if good investments are discovered in the future. 
E) A mature company raises new capital by issuing debt beyond the amount that is indicated by its normal target capital structure.

Question 4

According to the capital structure theory proposed by the Modigliani and Miller (MM), a firm's optimal capital structure is the mix of debt and equity that minimizes its weighted average cost of capital (WACC), which occurs when the firm is financed almost entirely with debt. MM argued that their conclusion is valid primarily because, in the real world, ______.

Accepted Answer

A) there are no flotation costs associated with issuing debt 
B) investors pay less personal income taxes on the interest they earn on their investments in bonds than they pay on the dividends they receive from corporations 
C) firms that issue large amounts of debt have much less probability of going bankrupt than firms that have little or no debt in their capital structures. 
D) the amount of debt a firm uses to finance its assets does not affect its market value 
E) interest paid on corporate debt is a tax-deductible expense to the firm, whereas dividends paid to stockholders are not. 
A) there are no flotation costs associated with issuing debt 
B) investors pay less personal income taxes on the interest they earn on their investments in bonds than they pay on the dividends they receive from corporations 
C) firms that issue large amounts of debt have much less probability of going bankrupt than firms that have little or no debt in their capital structures. 
D) the amount of debt a firm uses to finance its assets does not affect its market value 
E) interest paid on corporate debt is a tax-deductible expense to the firm, whereas dividends paid to stockholders are not.

Question 5

Which of the following statements is true of the capital structure of companies in Germany?

Accepted Answer

A) Companies in Germany use the lowest proportion of debt of industrialized countries. 
B) Companies in Germany use only equity to finance their projects. 
C) The corporate debt raised by companies in Germany mostly consists of publicly issued bonds. 
D) Debt monitoring costs are high in Germany because of stringent audit requirements. 
E) Companies in Germany raise most of their corporate debt through bank loans. 
A) Companies in Germany use the lowest proportion of debt of industrialized countries. 
B) Companies in Germany use only equity to finance their projects. 
C) The corporate debt raised by companies in Germany mostly consists of publicly issued bonds. 
D) Debt monitoring costs are high in Germany because of stringent audit requirements. 
E) Companies in Germany raise most of their corporate debt through bank loans.

Question 6

The degree of financial leverage (DFL) is defined as the percentage change in ______ that results from a particular percentage change in _____.

Accepted Answer

A) earnings before interest and taxes (EBIT); sales 
B) sales; earnings per share (EPS) 
C) EPS; sales 
D) EPS; EBIT 
E) sales; EBIT 
A) earnings before interest and taxes (EBIT); sales 
B) sales; earnings per share (EPS) 
C) EPS; sales 
D) EPS; EBIT 
E) sales; EBIT

Question 7

Assume that a firm's degree of financial leverage (DFL) is 1.2. If sales this year increase by 20 percent, the firm expects a 60 percent increase in earnings per share (EPS). What is the firm's degree of operating leverage of the firm?

Accepted Answer

A) 2.5× 
B) 3.0× 
C) 1.8× 
D) 0.4× 
E) 3.6× 
A) 2.5× 
B) 3.0× 
C) 1.8× 
D) 0.4× 
E) 3.6×

Question 8

According to the signaling theory to explain differences in firms' capital structures, if a firm raises new capital by issuing debt rather than by issuing stock, it is a signal that the firm has very good future prospects.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements concerning the capital structures of Japanese companies is correct?

Accepted Answer

A) Companies in Japan are financed nearly entirely with equity. 
B) Companies in Japan use greater proportions of debt than companies in most other countries. 
C) The capital structures of most Japanese companies contain little debt that is issued in Japan; that is, most firms are financed with foreign debt. 
D) Debt monitoring costs are extremely high in Japan. 
E) Companies in Japan raise most of their funds using publicly-issued corporate bonds. 
A) Companies in Japan are financed nearly entirely with equity. 
B) Companies in Japan use greater proportions of debt than companies in most other countries. 
C) The capital structures of most Japanese companies contain little debt that is issued in Japan; that is, most firms are financed with foreign debt. 
D) Debt monitoring costs are extremely high in Japan. 
E) Companies in Japan raise most of their funds using publicly-issued corporate bonds.

Question 10

Financial leverage is the:

Accepted Answer

A) presence of fixed operating costs. 
B) portion of earnings that is paid out as dividends to the common stockholders. 
C) risk associated with a firm's operations. 
D) combination of the debt and the equity a firm uses to finance its assets. 
E) extent to which fixed-income securities are used in a firm's capital structure. 
A) presence of fixed operating costs. 
B) portion of earnings that is paid out as dividends to the common stockholders. 
C) risk associated with a firm's operations. 
D) combination of the debt and the equity a firm uses to finance its assets. 
E) extent to which fixed-income securities are used in a firm's capital structure.

Question 11

The probability of incurring bankruptcy increases as a firm's debt/equity ratio decreases.

Accepted Answer

A) True 
 B)False

Question 12

The percentage change in earnings before interest and taxes (EBIT) associated with a given percentage change in sales is known as the degree of _____.

Accepted Answer

A) financial leverage 
B) operating leverage 
C) total leverage 
D) combined leverage 
E) sales leverage 
A) financial leverage 
B) operating leverage 
C) total leverage 
D) combined leverage 
E) sales leverage

Question 13

A firm should raise capital according to its optimal capital structure so as to maximize its _____.

Accepted Answer

A) earnings per share (EPS) 
B) stock price 
C) weighted average cost of capital (WAC
C)  
D) net income 
E) retained earnings 
A) earnings per share (EPS) 
B) stock price 
C) weighted average cost of capital (WAC
C)  
D) net income 
E) retained earnings

Question 14

As a general rule, the optimal capital structure is the one that:

Accepted Answer

A) maximizes both the firm's expected EPS and its stock price. 
B) minimizes the interest rate on its debt and maximizes its expected earnings per share. 
C) minimizes its required rate on equity and maximizes its stock price. 
D) maximizes its stock price and minimizes its weighted average cost of capital. 
E) minimizes its expected earnings per share and maximizes its weighted average cost of capital. 
A) maximizes both the firm's expected EPS and its stock price. 
B) minimizes the interest rate on its debt and maximizes its expected earnings per share. 
C) minimizes its required rate on equity and maximizes its stock price. 
D) maximizes its stock price and minimizes its weighted average cost of capital. 
E) minimizes its expected earnings per share and maximizes its weighted average cost of capital.

Question 15

Which of the following statements is correct?

Accepted Answer

A) In countries where there are no taxes, corporations should use debt. 
B) In countries where capital gains are taxed, investors should prefer to own stocks rather than bonds. 
C) In countries where capital gains are not taxed, equity capital costs should be high. 
D) In countries where dividends are not taxed, the investors should prefer to own bonds rather than stocks. 
E) In countries where capital gains are not taxed, investors should prefer to own stocks rather than bonds. 
A) In countries where there are no taxes, corporations should use debt. 
B) In countries where capital gains are taxed, investors should prefer to own stocks rather than bonds. 
C) In countries where capital gains are not taxed, equity capital costs should be high. 
D) In countries where dividends are not taxed, the investors should prefer to own bonds rather than stocks. 
E) In countries where capital gains are not taxed, investors should prefer to own stocks rather than bonds.

Question 16

In the United States, equity monitoring costs are lower than most other developed countries.

Accepted Answer

A) True 
 B)False

Which of the following would be considered part of a firm's business risk?

Quick Launch Rocket Company, expects its sales to increase by 50 percent in the coming year. The firm's current earnings per share (EPS) is $3.25. Its degree of operating leverage is 1.6 and its degree of financial leverage is 2.1. What is the firm's projected EPS for the coming year?

Which of the following statements is true of the capital structure of companies in Germany?

The degree of financial leverage (DFL) is defined as the percentage change in __ that results from a particular percentage change in _.

Assume that a firm's degree of financial leverage (DFL) is 1.2. If sales this year increase by 20 percent, the firm expects a 60 percent increase in earnings per share (EPS). What is the firm's degree of operating leverage of the firm?

According to the signaling theory to explain differences in firms' capital structures, if a firm raises new capital by issuing debt rather than by issuing stock, it is a signal that the firm has very good future prospects.

Which of the following statements concerning the capital structures of Japanese companies is correct?

Financial leverage is the:

The probability of incurring bankruptcy increases as a firm's debt/equity ratio decreases.

The percentage change in earnings before interest and taxes (EBIT) associated with a given percentage change in sales is known as the degree of _____.

A firm should raise capital according to its optimal capital structure so as to maximize its _____.

As a general rule, the optimal capital structure is the one that:

Which of the following statements is correct?

In the United States, equity monitoring costs are lower than most other developed countries.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debt Characteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

Exam 12: Capital Structure

Which of the following would be considered part of a firm's business risk?

Quick Launch Rocket Company, expects its sales to increase by 50 percent in the coming year. The firm's current earnings per share (EPS) is $3.25. Its degree of operating leverage is 1.6 and its degree of financial leverage is 2.1. What is the firm's projected EPS for the coming year?

Which of the following statements is true of the capital structure of companies in Germany?

The degree of financial leverage (DFL) is defined as the percentage change in ______ that results from a particular percentage change in _____.

Assume that a firm's degree of financial leverage (DFL) is 1.2. If sales this year increase by 20 percent, the firm expects a 60 percent increase in earnings per share (EPS). What is the firm's degree of operating leverage of the firm?

According to the signaling theory to explain differences in firms' capital structures, if a firm raises new capital by issuing debt rather than by issuing stock, it is a signal that the firm has very good future prospects.

Which of the following statements concerning the capital structures of Japanese companies is correct?

Financial leverage is the:

The probability of incurring bankruptcy increases as a firm's debt/equity ratio decreases.

The percentage change in earnings before interest and taxes (EBIT) associated with a given percentage change in sales is known as the degree of _____.

A firm should raise capital according to its optimal capital structure so as to maximize its _____.

As a general rule, the optimal capital structure is the one that:

Which of the following statements is correct?

In the United States, equity monitoring costs are lower than most other developed countries.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debt Characteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

The degree of financial leverage (DFL) is defined as the percentage change in __ that results from a particular percentage change in _.