Question 1

The trade-off theory implies that the actual debt ratios will be described by:

Accepted Answer

A) a target model where companies have a leverage target. 
B) an adjustment model where companies adjust their leverage. 
C) a target model where companies have a leverage target but make no adjustments. 
D) a target-adjustment model where companies have a leverage target and make gradual adjustments to it. 
A) a target model where companies have a leverage target. 
B) an adjustment model where companies adjust their leverage. 
C) a target model where companies have a leverage target but make no adjustments. 
D) a target-adjustment model where companies have a leverage target and make gradual adjustments to it. D

Question 2

Which of the following statements is true?

Accepted Answer

A) A company's financial leverage can't affect investment decisions and its operating efficiency. 
B) Banks and finance companies have much higher debt/equity ratios than those of retailers and manufacturers. 
C) Banks and finance companies have much lower debt/equity ratios than those of retailers and manufacturers. 
D) None of the given options. 
A) A company's financial leverage can't affect investment decisions and its operating efficiency. 
B) Banks and finance companies have much higher debt/equity ratios than those of retailers and manufacturers. 
C) Banks and finance companies have much lower debt/equity ratios than those of retailers and manufacturers. 
D) None of the given options. B

Question 3

The problem of being forced to choose between foregoing a positive NPV project and seeing the share price fall because of a share issue can be overcome by maintaining:

Accepted Answer

A) stable dividends. 
B) target leverage levels. 
C) reserve borrowing capacity. 
D) a company's debt-equity ratio to less than 50 per cent. 
A) stable dividends. 
B) target leverage levels. 
C) reserve borrowing capacity. 
D) a company's debt-equity ratio to less than 50 per cent. C

Question 4

The pecking order theory:

Accepted Answer

A) predicts that announcement of a new share issue will cause the company's share price to fall. 
B) implies that a company's leverage will depend on the difference between its operating cash flow and its investment needs over time. 
C) predicts that,other things being equal,a company's leverage will be negatively related to its profitability. 
D) All of the given options. 
A) predicts that announcement of a new share issue will cause the company's share price to fall. 
B) implies that a company's leverage will depend on the difference between its operating cash flow and its investment needs over time. 
C) predicts that,other things being equal,a company's leverage will be negatively related to its profitability. 
D) All of the given options.

Question 5

Which of the following statements is consistent with the trade-off theory?

Accepted Answer

A) Costs of financial distress are likely to be most serious for companies with significant intangible assets. 
B) A negative relationship exists between leverage and profitability. 
C) Companies with mostly intangible assets are likely to borrow more. 
D) A positive relationship exists between leverage and non-debt tax shields. 
A) Costs of financial distress are likely to be most serious for companies with significant intangible assets. 
B) A negative relationship exists between leverage and profitability. 
C) Companies with mostly intangible assets are likely to borrow more. 
D) A positive relationship exists between leverage and non-debt tax shields.

Question 6

Maintaining reserve borrowing capacity allows companies the benefit of:

Accepted Answer

A) financing projects,particularly for those that operate in low-growth industries. 
B) maintaining a constant dividend payout policy. 
C) overcoming the need to raise funds to finance projects from a new share issue. 
D) not rejecting negative NPV projects. 
A) financing projects,particularly for those that operate in low-growth industries. 
B) maintaining a constant dividend payout policy. 
C) overcoming the need to raise funds to finance projects from a new share issue. 
D) not rejecting negative NPV projects.

Question 7

Studies,which show that taxes affect marginal financing decisions,show that:

Accepted Answer

A) the present value of interest tax savings is positive and influences the choice of company debt ratios. 
B) taxes have a predictable effect on financing strategy. 
C) taxes are important for tactical financing decisions. 
D) all of the given options. 
A) the present value of interest tax savings is positive and influences the choice of company debt ratios. 
B) taxes have a predictable effect on financing strategy. 
C) taxes are important for tactical financing decisions. 
D) all of the given options.

Question 8

Evidence from companies that make 'dual issues' of debt and equity is inconsistent with the predictions of trade-off theory.

Accepted Answer

A) True 
 B)False

Question 9

Barclay and Smith (1996)investigated the significance of two features of debt--maturity and priority--and found that:

Accepted Answer

A) companies with low ratios of market value to book value tend to use debt of shorter maturity and lower priority. 
B) companies with high ratios of market value to book value tend to use debt of longer maturity and higher priority. 
C) companies with low ratios of market value to book value tend to use debt of longer maturity and higher priority. 
D) companies with high ratios of market value to book value tend to use debt of shorter maturity and higher priority. 
A) companies with low ratios of market value to book value tend to use debt of shorter maturity and lower priority. 
B) companies with high ratios of market value to book value tend to use debt of longer maturity and higher priority. 
C) companies with low ratios of market value to book value tend to use debt of longer maturity and higher priority. 
D) companies with high ratios of market value to book value tend to use debt of shorter maturity and higher priority.

Question 10

For companies that are unable to make immediate use of interest deductions,borrowing is likely to have:

Accepted Answer

A) a positive net tax advantage. 
B) a net tax disadvantage. 
C) a positive impact on financial distress because of the tax deductibility of interest on debt. 
D) a benefit of achieving an optimal capital structure. 
A) a positive net tax advantage. 
B) a net tax disadvantage. 
C) a positive impact on financial distress because of the tax deductibility of interest on debt. 
D) a benefit of achieving an optimal capital structure.

Question 11

Evidence suggests that the introduction of the imputation tax system has resulted in which of the following changes to capital structure:

Accepted Answer

A) no change in the capital structure of companies. 
B) an increase in corporate financial leverage than is typical under the classical system. 
C) a decrease in corporate financial leverage than is typical under the classical system. 
D) a decrease in the proportion of profits paid out as dividends. 
A) no change in the capital structure of companies. 
B) an increase in corporate financial leverage than is typical under the classical system. 
C) a decrease in corporate financial leverage than is typical under the classical system. 
D) a decrease in the proportion of profits paid out as dividends.

Question 12

Assume that LoPine Ltd,a US-based company (which has a classical taxation system),borrows $10 million at an interest rate of 15 per cent and uses the funds to repurchase shares worth $10 million.Further,assume that the company tax rate is 35 per cent,the marginal income tax rate is 30 per cent and the average tax rate on equity income is 12 per cent.Calculate the net tax savings per year.

Accepted Answer

A) $192 000 
B) $182 000 
C) $188 000 
D) $172 000 
A) $192 000 
B) $182 000 
C) $188 000 
D) $172 000

Question 13

Which of the following provides evidence that is consistent with the pecking order theory?

Accepted Answer

A) An unusually profitable firm in an industry with relatively slow growth will end up with an unusually high debt/equity ratio. 
B) An unusually profitable firm in an industry with relatively high growth will end up with an unusually low debt/equity ratio. 
C) An unprofitable firm in an industry with relatively slow growth will end up with a low debt/equity ratio. 
D) Companies' past needs for external finance,rather than a target capital structure,determine capital structures. 
A) An unusually profitable firm in an industry with relatively slow growth will end up with an unusually high debt/equity ratio. 
B) An unusually profitable firm in an industry with relatively high growth will end up with an unusually low debt/equity ratio. 
C) An unprofitable firm in an industry with relatively slow growth will end up with a low debt/equity ratio. 
D) Companies' past needs for external finance,rather than a target capital structure,determine capital structures.

Question 14

___________ risk includes the possibility that a sudden change of government may be followed by expropriation of foreign-owned assets or a difficulty to transfer dividends out of the country.

Accepted Answer

The answer of ___________ risk includes the possibility that a...

Question 15

Evidence from surveys of CFOs provides support to the _____________ theory.

Accepted Answer

The answer of Evidence from surveys of CFOs provides support...

Question 16

Mehrotra,Mikkelson and Partch (2003)found that:

Accepted Answer

A) higher leverage is related to higher profitability,lower variability of industry operating income and a greater proportion of tangible assets. 
B) higher leverage is related to lower profitability. 
C) higher leverage is related to negative profitability. 
D) higher leverage is related to higher profitability and higher variability of industry operating income. 
A) higher leverage is related to higher profitability,lower variability of industry operating income and a greater proportion of tangible assets. 
B) higher leverage is related to lower profitability. 
C) higher leverage is related to negative profitability. 
D) higher leverage is related to higher profitability and higher variability of industry operating income.

Question 17

Company financing can be considered as a _____________ problem by using the fact that different investors have different tastes,preferences and levels of wealth to explain the coexistence of securities which differ in terms of characteristics such as risk,return,tax treatment and voting rights.

Accepted Answer

The answer of Company financing can be considered as a...

Question 18

Which of the following approaches appears to be ideal for studying the relationship between capital structure and company value?

Accepted Answer

A) An examination of bankruptcy costs incurred by failed companies. 
B) An examination of companies with tax losses carried forward. 
C) An examination of transactions in which one type of security is exchanged for another. 
D) An examination of capital-raising transactions by companies from different industries. 
A) An examination of bankruptcy costs incurred by failed companies. 
B) An examination of companies with tax losses carried forward. 
C) An examination of transactions in which one type of security is exchanged for another. 
D) An examination of capital-raising transactions by companies from different industries.

Question 19

Barclay,Smith and Watts (1995)found that:

Accepted Answer

A) the relationship between leverage and the market-book value ratio was highly significant in a statistical sense but was not 'economically' significant. 
B) taxes do not have an important effect on corporate leverage decisions. 
C) their findings are consistent with the pecking order theory because they show that leverage is negatively related to profitability. 
D) leverage was positively related to the tangibility of assets and negatively related to the market-book value ratio in seven countries. 
A) the relationship between leverage and the market-book value ratio was highly significant in a statistical sense but was not 'economically' significant. 
B) taxes do not have an important effect on corporate leverage decisions. 
C) their findings are consistent with the pecking order theory because they show that leverage is negatively related to profitability. 
D) leverage was positively related to the tangibility of assets and negatively related to the market-book value ratio in seven countries.

Question 20

An important prediction of the pecking order theory is that an announcement of a new share issue will cause the company's:

Accepted Answer

A) share price to fall. 
B) share price to rise. 
C) share price to fall by a minimum of 10%. 
D) share price to rise by a minimum of 10%. 
A) share price to fall. 
B) share price to rise. 
C) share price to fall by a minimum of 10%. 
D) share price to rise by a minimum of 10%.

Exam 13: Capital Structure Decisions

The trade-off theory implies that the actual debt ratios will be described by:

Which of the following statements is true?

The problem of being forced to choose between foregoing a positive NPV project and seeing the share price fall because of a share issue can be overcome by maintaining:

The pecking order theory:

Which of the following statements is consistent with the trade-off theory?

Maintaining reserve borrowing capacity allows companies the benefit of:

Studies,which show that taxes affect marginal financing decisions,show that:

Evidence from companies that make 'dual issues' of debt and equity is inconsistent with the predictions of trade-off theory.

Barclay and Smith (1996)investigated the significance of two features of debt--maturity and priority--and found that:

For companies that are unable to make immediate use of interest deductions,borrowing is likely to have:

Evidence suggests that the introduction of the imputation tax system has resulted in which of the following changes to capital structure:

Which of the following provides evidence that is consistent with the pecking order theory?

___________ risk includes the possibility that a sudden change of government may be followed by expropriation of foreign-owned assets or a difficulty to transfer dividends out of the country.

Evidence from surveys of CFOs provides support to the _____________ theory.

Mehrotra,Mikkelson and Partch (2003)found that:

Company financing can be considered as a _____________ problem by using the fact that different investors have different tastes,preferences and levels of wealth to explain the coexistence of securities which differ in terms of characteristics such as risk,return,tax treatment and voting rights.

Which of the following approaches appears to be ideal for studying the relationship between capital structure and company value?

Barclay,Smith and Watts (1995)found that:

An important prediction of the pecking order theory is that an announcement of a new share issue will cause the company's:

Introduction

Consumption, Investment and the Capital Market

The Time Value of Money: An Introduction to Financial Mathematics

Applying the Time Value of Money to Security Valuation

Project Evaluation: Principles and Methods

The Application of Project Evaluation Methods

Risk and Return

The Capital Market

Sources of Finance: Equity

Sources of Finance: Debt

Payout Policy

Principles of Capital Structure

The Cost of Capital and Taxation Issues in Project Evaluation

Leasing and Other Equipment Finance

Capital Market Efficiency

Futures Contracts

Options and Contingent Claims

Analysis of Takeovers

International Financial Management

Management of Short-Term Assets: Inventory

Management of Short-Term Assets: Liquid Assets and Accounts Receivable

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