Question 1

Which of the following statements is correct?

Accepted Answer

A)  The effect of increasing a firm's use of financial leverage is to decrease the volatility of the firm's earnings. 
B)  The effect of increasing a firm's use of financial leverage could be either to increase or decrease the volatility of the firm's earnings depending on how much leverage is utilized. 
C)  The effect of increasing a firm's use of financial leverage is to increase the volatility of the firm's earnings. 
D)  None of these statements is correct. 
A)  The effect of increasing a firm's use of financial leverage is to decrease the volatility of the firm's earnings. 
B)  The effect of increasing a firm's use of financial leverage could be either to increase or decrease the volatility of the firm's earnings depending on how much leverage is utilized. 
C)  The effect of increasing a firm's use of financial leverage is to increase the volatility of the firm's earnings. 
D)  None of these statements is correct.

Question 2

No Nuns Cos. has a 20 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $80 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:   The firm is considering switching to a 20 percent debt capital structure, and has determined that they would have to pay a 7 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

Accepted Answer

A)  $1.20 
B)  $1.04 
C)  $0.93 
D)  $1.29 
A)  $1.20 
B)  $1.04 
C)  $0.93 
D)  $1.29

Question 3

Your company doesn't face any taxes and has $200 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:   The firm is considering switching to a 40-percent debt capital structure, and has determined that they would have to pay an 8 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

Accepted Answer

A)  $0.75 
B)  $1.1325 
C)  $1.1925 
D)  $1.55 
A)  $0.75 
B)  $1.1325 
C)  $1.1925 
D)  $1.55

Question 4

Suppose that a company's equity is currently selling for $30 per share and that there are 5 million shares outstanding. If the firm also has 20 thousand bonds outstanding, which are selling at 98 percent of par ($1,000), what are the firm's current capital structure weights for equity and debt respectively?

Accepted Answer

A)  50%, 50% 
B)  88.44%, 11.56% 
C)  99.60%, 0.40% 
D)  88.23%, 11.77% 
A)  50%, 50% 
B)  88.44%, 11.56% 
C)  99.60%, 0.40% 
D)  88.23%, 11.77%

Question 5

This is the rule under which claimants are paid in a Chapter 7 bankruptcy.

Accepted Answer

A)  first come, first served 
B)  absolute priority 
C)  term structure priority 
D)  date due priority 
A)  first come, first served 
B)  absolute priority 
C)  term structure priority 
D)  date due priority

Question 6

Daddi Mac, Inc., doesn't face any taxes and has $250 million in assets, currently financed entirely with equity. Equity is worth $13 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:   The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the level of expected EPS if they switch to the proposed capital structure?

Accepted Answer

A)  $0.13 
B)  $0.21 
C)  $0.27 
D)  $0.16 
A)  $0.13 
B)  $0.21 
C)  $0.27 
D)  $0.16

Question 7

Daddi Mac, Inc., doesn't face any taxes and has $250 million in assets, currently financed entirely with equity. Equity is worth $13 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:   The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the standard deviation in EPS if they switch to the proposed capital structure?

Accepted Answer

A)  $0.33 
B)  $0.26 
C)  $0.21 
D)  $0.16 
A)  $0.33 
B)  $0.26 
C)  $0.21 
D)  $0.16

Question 8

Your company faces a 34% tax rate and has $200 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:   The firm is considering switching to a 40-percent debt capital structure, and has determined that they would have to pay an 8 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

Accepted Answer

A)  $0.748 
B)  $0.7965 
C)  $0.946 
D)  $1.023 
A)  $0.748 
B)  $0.7965 
C)  $0.946 
D)  $1.023

Question 9

Which strategy, active or passive capital structure management, would make the process of changing the firm's capital structure a longer-term proposition? Why?

Accepted Answer

Passive capital management wou

Question 10

Your company faces a 30% tax rate and has $300 million in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:   The firm is considering switching to a 30-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

Accepted Answer

A)  $0.30 
B)  $0.365 
C)  $0.44 
D)  $0.73 
A)  $0.30 
B)  $0.365 
C)  $0.44 
D)  $0.73

Question 11

The Modigilian-Miller (M&M) Theorem states that:

Accepted Answer

A)  In an efficient market without taxes and bankruptcy costs, the value of a firm depends upon the firm's capital structure. 
B)  In an efficient market without taxes and bankruptcy costs, the value of a firm does not depend upon the firm's capital structure. 
C)  In an efficient market without taxes and bankruptcy costs, the value of a firm does not depend upon the firm's cost of capital. 
D)  None of these. 
A)  In an efficient market without taxes and bankruptcy costs, the value of a firm depends upon the firm's capital structure. 
B)  In an efficient market without taxes and bankruptcy costs, the value of a firm does not depend upon the firm's capital structure. 
C)  In an efficient market without taxes and bankruptcy costs, the value of a firm does not depend upon the firm's cost of capital. 
D)  None of these.

Question 12

Your company faces a 34% tax rate and has $150 million in assets, currently financed entirely with equity. Equity is worth $8 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:   The firm is considering switching to a 25-percent debt capital structure, and has determined that they would have to pay a 12 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

Accepted Answer

A)  $0.49 
B)  $1.08 
C)  $1.31 
D)  $1.67 
A)  $0.49 
B)  $1.08 
C)  $1.31 
D)  $1.67

Question 13

Daddi Mac, Inc., doesn't face any taxes and has $250 million in assets, currently financed entirely with equity. Equity is worth $20 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:   The firm is considering switching to a 30 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the standard deviation in EPS if they switched to the proposed capital structure?

Accepted Answer

A)  $0.37 
B)  $0.21 
C)  $0.36 
D)  $0.29 
A)  $0.37 
B)  $0.21 
C)  $0.36 
D)  $0.29

Question 14

Which of the following statements is correct?

Accepted Answer

A)  Increasing the amount of firm debt increases both the expected cash flows to equity holders and the number of shares outstanding. 
B)  Increasing the amount of firm debt increases both the expected cash flows to equity holders and the amortization. 
C)  Increasing the amount of firm debt increases both the expected cash flows to equity holders and the volatility of those cash flows. 
D)  Increasing the amount of firm debt increases both the expected cash flows to equity holders and the tax liability. 
A)  Increasing the amount of firm debt increases both the expected cash flows to equity holders and the number of shares outstanding. 
B)  Increasing the amount of firm debt increases both the expected cash flows to equity holders and the amortization. 
C)  Increasing the amount of firm debt increases both the expected cash flows to equity holders and the volatility of those cash flows. 
D)  Increasing the amount of firm debt increases both the expected cash flows to equity holders and the tax liability.

Question 15

Why does allowing for the existence of corporate taxation cause firms to prefer the maximum amount of debt possible?

Accepted Answer

A)  Because the flotation costs associated with debt are significantly lower than the flotation costs associated with equity. 
B)  Because debt is tax-deductible, the effective cost of debt is much cheaper than using equity. 
C)  Because debt places fewer demands on the firm's cash flows. 
D)  None of these. 
A)  Because the flotation costs associated with debt are significantly lower than the flotation costs associated with equity. 
B)  Because debt is tax-deductible, the effective cost of debt is much cheaper than using equity. 
C)  Because debt places fewer demands on the firm's cash flows. 
D)  None of these.

Question 16

This is the assumption that decisions about which projects to fund are separate from the decisions about how to fund them.

Accepted Answer

A)  break-even principle 
B)  capital structure principle 
C)  separation principle 
D)  long position principle 
A)  break-even principle 
B)  capital structure principle 
C)  separation principle 
D)  long position principle

Question 17

HiLo, Inc., doesn't face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:   The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the level of expected EPS if they switch to the proposed capital structure?

Accepted Answer

A)  $3.19 
B)  $3.94 
C)  $4.41 
D)  $5.67 
A)  $3.19 
B)  $3.94 
C)  $4.41 
D)  $5.67

Question 18

The policy of changing the capital structure gradually over time by funding new capital projects disproportionately with the type of capital you want to increase in the capital structure is referred as ___________________.

Accepted Answer

A)  Separation principle 
B)  Overinvestment problem 
C)  Passive capital structure management 
D)  Active captive structure management 
A)  Separation principle 
B)  Overinvestment problem 
C)  Passive capital structure management 
D)  Active captive structure management

Question 19

Suppose that Lil John Industries' equity is currently selling for $64 per share and that there are 1 million shares outstanding. If the firm also has 20 thousand bonds outstanding, which are selling at 108 percent of par ($1,000), what are the firm's current capital structure weights?

Accepted Answer

A)  Weight of Equity = 25.23%; Weight of Debt = 74.77% 
B)  Weight of Equity = 84.77%; Weight of Debt = 15.23% 
C)  Weight of Equity = 74.77%; Weight of Debt = 25.23% 
D)  Weight of Equity = 32.23%; Weight of Debt = 67.77% 
A)  Weight of Equity = 25.23%; Weight of Debt = 74.77% 
B)  Weight of Equity = 84.77%; Weight of Debt = 15.23% 
C)  Weight of Equity = 74.77%; Weight of Debt = 25.23% 
D)  Weight of Equity = 32.23%; Weight of Debt = 67.77%

Question 20

This is the condition in which a firm is near bankruptcy.

Accepted Answer

A)  passive capital structure 
B)  active capital structure 
C)  financial distress 
D)  call position 
A)  passive capital structure 
B)  active capital structure 
C)  financial distress 
D)  call position

Which of the following statements is correct?

This is the rule under which claimants are paid in a Chapter 7 bankruptcy.

Which strategy, active or passive capital structure management, would make the process of changing the firm's capital structure a longer-term proposition? Why?

The Modigilian-Miller (M&M) Theorem states that:

Which of the following statements is correct?

Why does allowing for the existence of corporate taxation cause firms to prefer the maximum amount of debt possible?

This is the assumption that decisions about which projects to fund are separate from the decisions about how to fund them.

The policy of changing the capital structure gradually over time by funding new capital projects disproportionately with the type of capital you want to increase in the capital structure is referred as ___________________.

Suppose that Lil John Industries' equity is currently selling for $64 per share and that there are 1 million shares outstanding. If the firm also has 20 thousand bonds outstanding, which are selling at 108 percent of par ($1,000), what are the firm's current capital structure weights?

This is the condition in which a firm is near bankruptcy.

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Exam 16: Assessing Long-Term Debt, Equity, and Capital Structure

Which of the following statements is correct?

This is the rule under which claimants are paid in a Chapter 7 bankruptcy.

Which strategy, active or passive capital structure management, would make the process of changing the firm's capital structure a longer-term proposition? Why?

The Modigilian-Miller (M&M) Theorem states that:

Which of the following statements is correct?

Why does allowing for the existence of corporate taxation cause firms to prefer the maximum amount of debt possible?

This is the assumption that decisions about which projects to fund are separate from the decisions about how to fund them.

The policy of changing the capital structure gradually over time by funding new capital projects disproportionately with the type of capital you want to increase in the capital structure is referred as ___________________.

Suppose that Lil John Industries' equity is currently selling for $64 per share and that there are 1 million shares outstanding. If the firm also has 20 thousand bonds outstanding, which are selling at 108 percent of par ($1,000), what are the firm's current capital structure weights?

This is the condition in which a firm is near bankruptcy.

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters