Exam 14: Capital Structure and Dividend Policy Decisions

The fact that some managers are more aggressive in their use of debt financing in attempting to boost profits does not influence the optimal or value-maximizing capital structure.

(True/False)

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Question 21

A decrease in the debt-to-assets ratio will generally have no effect on ____ risk.

(Multiple Choice)

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Question 22

The announcement of an increase in the cash dividend always causes an increase in the price of the firm's common stock.

(True/False)

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Question 23

Copybold Corporation Copybold Corporation is a start-up firm considering two alternative capital structures⎯one is conservative and the other aggressive. The conservative capital structure calls for a D/A ratio = 0.25, while the aggressive strategy call for D/A = 0.75. Once the firm selects its target capital structure it envisions two possible scenarios for its operations: Feast or Famine. The Feast scenario has a 60 percent probability of occurring and forecast EBIT in this state is $60,000. The Famine state has a 40 percent chance of occurring and the EBIT is expected to be $20,000. Further, if the firm selects the conservative capital structure its cost of debt will be 10 percent, while with the aggressive capital structure its debt cost will be 12 percent. The firm will have $400,000 in total assets, it will face a 40 percent marginal tax rate, and the book value of equity per share under either scenario is $10.00 per share -Refer to Copybold Corporation.What is the difference between the EPS forecasts for Feast and Famine under the conservative capital structure?

(Multiple Choice)

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Question 24

Which of the following statements is correct?

(Multiple Choice)

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Question 25

The optimal capital structure is the one that maximizes the price of the stock,which always calls for a debt/asset ratio that is lower than the one that maximizes EPS.

(True/False)

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Question 26

Which of the following factors do not have an impact on the business risk of a firm?

(Multiple Choice)

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Question 27

Strategic Systems Inc.expects to have net income of $800,000 during the next year.Its target,and current,capital structure is 40 percent debt and 60 percent common equity.The Director of Capital Budgeting has determined that the optimal capital budget for next year is $1.2 million.If Strategic uses the residual dividend model to determine next year's dividend payout,what is the expected payout ratio?

(Multiple Choice)

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Question 28

From the information below,select the optimal capital structure for Minnow Entertainment Company.

(Multiple Choice)

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Question 29

In a world with no taxes,MM show that the capital structure of a firm does not affect the value of the firm.However,when taxes are considered,MM show a positive relationship between debt and firm value.

(True/False)

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Question 30

Changing the capital structure of the firm will affect the riskiness inherent in the firm's common stock,which will affect the return demanded by stockholders and the stock's

(True/False)

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Question 31

In theory,dividends are determined as a residual item.Therefore,the better the firm's investment opportunities,the lower its dividend payments should be.

(True/False)

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Question 32

The most commonly held view of capital structure,according to the text,is that the weighted average cost of capital

(Multiple Choice)

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Question 33

If we include the cost of bankruptcy in the MM analysis of capital structure in a world with taxes,we would tend to believe that the cost of debt increases as leverage increases and that there is probably an optimal capital structure.

(True/False)

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Question 34

According to the signaling theory of capital structure,a firm with favorable prospects should raise new capital by issuing and a firm with unfavorable prospects raise new capital by issuing .

(Multiple Choice)

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Question 35

Which of the following factors does not affect a firm's business risk?

(Multiple Choice)

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Question 36

The level of sales at which expected EPS will be the same regardless of whether the firm uses debt or common stock financing is called the EPS indifference point.

(True/False)

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Question 37

If you know that your firm is facing relatively poor prospects but needs new capital,and you know that investors do not have this information,signaling theory would predict that you would

(Multiple Choice)

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Question 38

The weighted average cost of capital (WACC)declines as more of the lowest cost component is added.What limits a firm from using nearly all debt is that as the debt-to-assets ratio rises,the absolute interest expense gets very large.The large interest expense reduces income and results in a debt-to-assets ratio limit even though the WACC continues to decline.

(True/False)

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Question 39

The firm's target capital structure is consistent with which of the following?

(Multiple Choice)

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Question 40

Showing 21 - 40 of 120

The fact that some managers are more aggressive in their use of debt financing in attempting to boost profits does not influence the optimal or value-maximizing capital structure.

A decrease in the debt-to-assets ratio will generally have no effect on ____ risk.

The announcement of an increase in the cash dividend always causes an increase in the price of the firm's common stock.

Which of the following statements is correct?

The optimal capital structure is the one that maximizes the price of the stock,which always calls for a debt/asset ratio that is lower than the one that maximizes EPS.

Which of the following factors do not have an impact on the business risk of a firm?

From the information below,select the optimal capital structure for Minnow Entertainment Company.

In a world with no taxes,MM show that the capital structure of a firm does not affect the value of the firm.However,when taxes are considered,MM show a positive relationship between debt and firm value.

Changing the capital structure of the firm will affect the riskiness inherent in the firm's common stock,which will affect the return demanded by stockholders and the stock's

In theory,dividends are determined as a residual item.Therefore,the better the firm's investment opportunities,the lower its dividend payments should be.

The most commonly held view of capital structure,according to the text,is that the weighted average cost of capital

If we include the cost of bankruptcy in the MM analysis of capital structure in a world with taxes,we would tend to believe that the cost of debt increases as leverage increases and that there is probably an optimal capital structure.

According to the signaling theory of capital structure,a firm with favorable prospects should raise new capital by issuing and a firm with unfavorable prospects raise new capital by issuing .

Which of the following factors does not affect a firm's business risk?

The level of sales at which expected EPS will be the same regardless of whether the firm uses debt or common stock financing is called the EPS indifference point.

If you know that your firm is facing relatively poor prospects but needs new capital,and you know that investors do not have this information,signaling theory would predict that you would

The firm's target capital structure is consistent with which of the following?

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters

Exam 14: Capital Structure and Dividend Policy Decisions

The fact that some managers are more aggressive in their use of debt financing in attempting to boost profits does not influence the optimal or value-maximizing capital structure.

A decrease in the debt-to-assets ratio will generally have no effect on ____ risk.

The announcement of an increase in the cash dividend always causes an increase in the price of the firm's common stock.

Which of the following statements is correct?

The optimal capital structure is the one that maximizes the price of the stock,which always calls for a debt/asset ratio that is lower than the one that maximizes EPS.

Which of the following factors do not have an impact on the business risk of a firm?

From the information below,select the optimal capital structure for Minnow Entertainment Company.

In a world with no taxes,MM show that the capital structure of a firm does not affect the value of the firm.However,when taxes are considered,MM show a positive relationship between debt and firm value.

Changing the capital structure of the firm will affect the riskiness inherent in the firm's common stock,which will affect the return demanded by stockholders and the stock's

In theory,dividends are determined as a residual item.Therefore,the better the firm's investment opportunities,the lower its dividend payments should be.

The most commonly held view of capital structure,according to the text,is that the weighted average cost of capital

If we include the cost of bankruptcy in the MM analysis of capital structure in a world with taxes,we would tend to believe that the cost of debt increases as leverage increases and that there is probably an optimal capital structure.

According to the signaling theory of capital structure,a firm with favorable prospects should raise new capital by issuing ____ and a firm with unfavorable prospects raise new capital by issuing ____.

Which of the following factors does not affect a firm's business risk?

The level of sales at which expected EPS will be the same regardless of whether the firm uses debt or common stock financing is called the EPS indifference point.

If you know that your firm is facing relatively poor prospects but needs new capital,and you know that investors do not have this information,signaling theory would predict that you would

The firm's target capital structure is consistent with which of the following?

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters

According to the signaling theory of capital structure,a firm with favorable prospects should raise new capital by issuing and a firm with unfavorable prospects raise new capital by issuing .