Question 1

With the inclusion of taxes, MM I is incorrect and the capital structure of the firm can be important due to:

Accepted Answer

A) Lower tax rates on dividends than on debt 
B) Higher tax rates on retained earnings than on debt 
C) Lower tax liability due to interest deductibility 
D) Higher operating income from less dividends 
A) Lower tax rates on dividends than on debt 
B) Higher tax rates on retained earnings than on debt 
C) Lower tax liability due to interest deductibility 
D) Higher operating income from less dividends

Question 2

As the debt to equity ratio decreases when debt is not risk free:

Accepted Answer

A) Debt holders demand a higher expected return 
B) Debt holders demand a lower expected return 
C) The expected return on equity increases 
D) The expected return on assets increases 
A) Debt holders demand a higher expected return 
B) Debt holders demand a lower expected return 
C) The expected return on equity increases 
D) The expected return on assets increases

Question 3

A firm is expected to generate $1.5 million in operating income and pay $250,000 in interest.Ignoring taxes, this will generate $12.50 earnings per share.What will happen to EPS if operating income increases to $2.0 million?

Accepted Answer

A) EPS will increase to $15.63 
B) EPS will increase to $16.67 
C) EPS will increase to $17.50 
D) EPS will increase to $20.00 
A) EPS will increase to $15.63 
B) EPS will increase to $16.67 
C) EPS will increase to $17.50 
D) EPS will increase to $20.00

Question 4

Which of the following would not be expected to change with changes in the firm's capital structure?

Accepted Answer

A) Weighted-average cost of capital 
B) Expected return on equity 
C) Expected return on assets 
D) Expected earnings per share 
A) Weighted-average cost of capital 
B) Expected return on equity 
C) Expected return on assets 
D) Expected earnings per share

Question 5

With risky debt and MM II, the expected return on assets _____ as the debt-equity ratio _____.

Accepted Answer

A) Increases; increases 
B) Decreases; increases 
C) Increases; decreases 
D) Is constant; increases 
A) Increases; increases 
B) Decreases; increases 
C) Increases; decreases 
D) Is constant; increases

Question 6

A firm's capital structure refers to the maturity of debt it employs.

Accepted Answer

The answer of A firm's capital structure refers to the...

Question 7

The reason that financial leverage increases shareholder risk is that there is:

Accepted Answer

A) More debt which increases the operating risk 
B) Less equity to absorb the operating risk 
C) Less business risk to be spread around 
D) More financial risk due to reduced business risk 
A) More debt which increases the operating risk 
B) Less equity to absorb the operating risk 
C) Less business risk to be spread around 
D) More financial risk due to reduced business risk

Question 8

What is the expected rate of return to equityholders if the firm has a 35% tax rate, a 10% rate of interest paid on debt, a 15% WACC and a 60% debt-asset ratio?

Accepted Answer

A) 12.50% 
B) 21.25% 
C) 22.50% 
D) 27.75% 
A) 12.50% 
B) 21.25% 
C) 22.50% 
D) 27.75%

Question 9

Although the value of an additional interest tax shield may be positive, firms may restrict borrowing if:

Accepted Answer

A) The returns on the project are too high 
B) Their asset base is largely intangible 
C) Their asset beta is zero 
D) The borrowing increases their WACC 
A) The returns on the project are too high 
B) Their asset base is largely intangible 
C) Their asset beta is zero 
D) The borrowing increases their WACC

Question 10

What's the pecking order theory?

Accepted Answer

The pecking order theory says that firms

Question 11

Calculate the annual value of an interest tax shield under the assumption that a firm maintains debt at a permanent $1,000,000 level and rate of 12%.The corporate tax rate is 35%.If there is no chance of financial distress, how does the value of the firm change as a result of this debt?

Accepted Answer

Annual tax shield = debt * interest rate

Question 12

According to MM, if individuals cannot obtain the same borrowing terms as firms, then:

Accepted Answer

A) Capital structure may be relevant 
B) Capital structure may be irrelevant 
C) Individuals should not invest in levered firms 
D) Firms should increase their payments to individuals 
A) Capital structure may be relevant 
B) Capital structure may be irrelevant 
C) Individuals should not invest in levered firms 
D) Firms should increase their payments to individuals

Question 13

Proposition II of MM states that the expected return on assets increases as the debt-equity ratio increases.

Accepted Answer

A) True 
 B)False

Question 14

When large firms file for bankruptcy, they usually do so under an arrangement called:

Accepted Answer

A) Chapter 9 
B) Chapter 11 
C) Chapter 13 
D) Chapter 14 
A) Chapter 9 
B) Chapter 11 
C) Chapter 13 
D) Chapter 14

Question 15

Which of the following is an example of restructuring the firm?

Accepted Answer

A) Dividends are increased from $1 to $2 per share 
B) A new investment increases the firm's business risk 
C) New equity is issued and the proceeds repay debt 
D) A new board of directors is elected to the firm 
A) Dividends are increased from $1 to $2 per share 
B) A new investment increases the firm's business risk 
C) New equity is issued and the proceeds repay debt 
D) A new board of directors is elected to the firm

Question 16

According to MM II, if the expected return on assets decreases, what happens to the expected return on equity?

Accepted Answer

A) Depends on the firm's capital structure 
B) Decreases 
C) Remains constant 
D) Increases 
A) Depends on the firm's capital structure 
B) Decreases 
C) Remains constant 
D) Increases

Question 17

MM Proposition I states that a firm's value is unaffected by its:

Accepted Answer

A) Required rate of return on equity 
B) Operating income, in the absence of taxes 
C) Interest rate paid on debt 
D) Mixture of debt and equity 
A) Required rate of return on equity 
B) Operating income, in the absence of taxes 
C) Interest rate paid on debt 
D) Mixture of debt and equity

Question 18

Debt financing affects neither the operating risk nor the business risk of the firm.

Accepted Answer

A) True 
 B)False

Question 19

Explain the pecking-order theory of capital structure.How will this affect the "optimal" capital structure for a firm?

Accepted Answer

Managers who are choosing between debt a

Question 20

The pecking-order theory suggests that less profitable firms borrow more because:

Accepted Answer

A) Equity issues are more expensive 
B) Leverage is preferred over raising funds internally 
C) Debt issues are good omens 
D) They have insufficient internal funds 
A) Equity issues are more expensive 
B) Leverage is preferred over raising funds internally 
C) Debt issues are good omens 
D) They have insufficient internal funds

Exam 16: Debt Policy

With the inclusion of taxes, MM I is incorrect and the capital structure of the firm can be important due to:

As the debt to equity ratio decreases when debt is not risk free:

A firm is expected to generate $1.5 million in operating income and pay $250,000 in interest.Ignoring taxes, this will generate $12.50 earnings per share.What will happen to EPS if operating income increases to $2.0 million?

Which of the following would not be expected to change with changes in the firm's capital structure?

With risky debt and MM II, the expected return on assets _____ as the debt-equity ratio _____.

A firm's capital structure refers to the maturity of debt it employs.

The reason that financial leverage increases shareholder risk is that there is:

What is the expected rate of return to equityholders if the firm has a 35% tax rate, a 10% rate of interest paid on debt, a 15% WACC and a 60% debt-asset ratio?

Although the value of an additional interest tax shield may be positive, firms may restrict borrowing if:

What's the pecking order theory?

Calculate the annual value of an interest tax shield under the assumption that a firm maintains debt at a permanent $1,000,000 level and rate of 12%.The corporate tax rate is 35%.If there is no chance of financial distress, how does the value of the firm change as a result of this debt?

According to MM, if individuals cannot obtain the same borrowing terms as firms, then:

Proposition II of MM states that the expected return on assets increases as the debt-equity ratio increases.

When large firms file for bankruptcy, they usually do so under an arrangement called:

Which of the following is an example of restructuring the firm?

According to MM II, if the expected return on assets decreases, what happens to the expected return on equity?

MM Proposition I states that a firm's value is unaffected by its:

Debt financing affects neither the operating risk nor the business risk of the firm.

Explain the pecking-order theory of capital structure.How will this affect the "optimal" capital structure for a firm?

The pecking-order theory suggests that less profitable firms borrow more because:

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

Filters

With risky debt and MM II, the expected return on assets _ as the debt-equity ratio _.