Question 1

Based upon the "trade-off theory" of capital structure,what differences might you expect in the capital structure of a food producer and a defense contractor?

Accepted Answer

A)  Higher debt-equity ratio for food producer. 
B)  Higher debt-equity ratio for defense contractor. 
C)  Neither firm should use debt in their structure. 
D)  Differences in capital structure will make no valuation differences in these firms. 
A)  Higher debt-equity ratio for food producer. 
B)  Higher debt-equity ratio for defense contractor. 
C)  Neither firm should use debt in their structure. 
D)  Differences in capital structure will make no valuation differences in these firms.

Question 2

Ignoring taxes,a firm's weighted-average cost of capital is equal to:

Accepted Answer

A)  its expected return on assets. 
B)  its expected return on equity. 
C)  the sum of expected return on equity and expected return on debt. 
D)  its expected return on assets times the debt-equity ratio. 
A)  its expected return on assets. 
B)  its expected return on equity. 
C)  the sum of expected return on equity and expected return on debt. 
D)  its expected return on assets times the debt-equity ratio.

Question 3

When corporate taxes and the cost of financial distress are taken into consideration,the market value of a firm equals the value if all-equity-financed _____ the PV of the tax shield _____ the costs of financial distress.

Accepted Answer

A)  plus; plus 
B)  minus; plus 
C)  plus; minus 
D)  minus; minus 
A)  plus; plus 
B)  minus; plus 
C)  plus; minus 
D)  minus; minus

Question 4

Debt financing affects neither the operating risk nor the business risk of the firm.However,if there is less equity outstanding,a change in operating income has a greater impact on earnings per share.

Accepted Answer

A) True 
 B)False

Question 5

Stockholders' expected return on a stock priced at $25 per share with zero-growth dividends of $4.00 is:

Accepted Answer

A)  6.25%. 
B)  13.64%. 
C)  16.00%. 
D)  21.00%. 
A)  6.25%. 
B)  13.64%. 
C)  16.00%. 
D)  21.00%.

Question 6

A firm's business risk depends upon:

Accepted Answer

A)  its use of debt in the capital structure. 
B)  the risk of the firm's assets and operations. 
C)  whether individuals are able to undo the leverage. 
D)  the costs of financial distress. 
A)  its use of debt in the capital structure. 
B)  the risk of the firm's assets and operations. 
C)  whether individuals are able to undo the leverage. 
D)  the costs of financial distress.

Question 7

The risk of tax shields can be reasonably assumed to be the same as that of the interest payments generating them.

Accepted Answer

A) True 
 B)False

Question 8

Equity,Inc.is currently an all-equity-financed firm.It has 10,000 shares outstanding that sell for $20 each.The firm has an operating income of $30,000 and pays no taxes.The firm contemplates a restructuring that would issue $50,000 in 8% debt which will be used to repurchase stock.Assuming that individuals have the same borrowing opportunities as corporations,explain how an investor can undo the leverage that is proposed by Equity,Inc.Under these conditions,what is the value of restructuring to a firm?

Accepted Answer

Since Equity,Inc.will have a debt ratio

Question 9

When financial disaster is looming,management may borrow to invest in projects having a negative expected NPV because:

Accepted Answer

A)  the firm's beta is now negative. 
B)  taxes are no longer a concern. 
C)  the interest tax shield will cover the loan costs. 
D)  the lender bears all the risk. 
A)  the firm's beta is now negative. 
B)  taxes are no longer a concern. 
C)  the interest tax shield will cover the loan costs. 
D)  the lender bears all the risk.

Question 10

Is financial slack always valuable?

Accepted Answer

Not if it leads to slack manag

Question 11

According to the trade-off theory,the capital structure is a trade-off between:

Accepted Answer

A)  tangible and intangible asset risk. 
B)  high and low target debt ratios. 
C)  tax savings and financial distress costs. 
D)  tax shields and equity financing. 
A)  tangible and intangible asset risk. 
B)  high and low target debt ratios. 
C)  tax savings and financial distress costs. 
D)  tax shields and equity financing.

Question 12

Discuss how agency problems can develop between shareholders and bondholders when the firm is experiencing financial distress.

Accepted Answer

Managers/owners may not have the proper

Question 13

One advantage of debt financing over equity financing is:

Accepted Answer

A)  tax-deductible dividends. 
B)  tax-deductible interest. 
C)  tax-deductible principal repayment. 
D)  tax-free interest income. 
A)  tax-deductible dividends. 
B)  tax-deductible interest. 
C)  tax-deductible principal repayment. 
D)  tax-free interest income.

Question 14

Calculate the firm's expected return on its assets if its expected return on debt is 10%,its expected return on equity is 20%,and its WACC is 14%.

Accepted Answer

A)  14% 
B)  15% 
C)  16% 
D)  Cannot be calculated 
A)  14% 
B)  15% 
C)  16% 
D)  Cannot be calculated

Based upon the "trade-off theory" of capital structure,what differences might you expect in the capital structure of a food producer and a defense contractor?

Ignoring taxes,a firm's weighted-average cost of capital is equal to:

When corporate taxes and the cost of financial distress are taken into consideration,the market value of a firm equals the value if all-equity-financed _ the PV of the tax shield _ the costs of financial distress.

Debt financing affects neither the operating risk nor the business risk of the firm.However,if there is less equity outstanding,a change in operating income has a greater impact on earnings per share.

Stockholders' expected return on a stock priced at $25 per share with zero-growth dividends of $4.00 is:

A firm's business risk depends upon:

The risk of tax shields can be reasonably assumed to be the same as that of the interest payments generating them.

When financial disaster is looming,management may borrow to invest in projects having a negative expected NPV because:

Is financial slack always valuable?

According to the trade-off theory,the capital structure is a trade-off between:

Discuss how agency problems can develop between shareholders and bondholders when the firm is experiencing financial distress.

One advantage of debt financing over equity financing is:

Calculate the firm's expected return on its assets if its expected return on debt is 10%,its expected return on equity is 20%,and its WACC is 14%.

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters

Exam 16: Debt Policy

Based upon the "trade-off theory" of capital structure,what differences might you expect in the capital structure of a food producer and a defense contractor?

Ignoring taxes,a firm's weighted-average cost of capital is equal to:

When corporate taxes and the cost of financial distress are taken into consideration,the market value of a firm equals the value if all-equity-financed _____ the PV of the tax shield _____ the costs of financial distress.

Debt financing affects neither the operating risk nor the business risk of the firm.However,if there is less equity outstanding,a change in operating income has a greater impact on earnings per share.

Stockholders' expected return on a stock priced at $25 per share with zero-growth dividends of $4.00 is:

A firm's business risk depends upon:

The risk of tax shields can be reasonably assumed to be the same as that of the interest payments generating them.

When financial disaster is looming,management may borrow to invest in projects having a negative expected NPV because:

Is financial slack always valuable?

According to the trade-off theory,the capital structure is a trade-off between:

Discuss how agency problems can develop between shareholders and bondholders when the firm is experiencing financial distress.

One advantage of debt financing over equity financing is:

Calculate the firm's expected return on its assets if its expected return on debt is 10%,its expected return on equity is 20%,and its WACC is 14%.

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters

When corporate taxes and the cost of financial distress are taken into consideration,the market value of a firm equals the value if all-equity-financed _ the PV of the tax shield _ the costs of financial distress.