Question 1

According to the tax shield hypothesis,we should expect to find:

Accepted Answer

A) a negative relationship between companies with high non-debt tax shields and companies with low debt/equity ratios. 
B) a positive relationship between companies with high non-debt tax shields and companies with high debt/equity ratios. 
C) a positive relationship between companies with high non-debt tax shields and companies with low debt/equity ratios. 
D) a positive relationship between companies with low non-debt tax shields and companies with low debt/equity ratios. 
A) a negative relationship between companies with high non-debt tax shields and companies with low debt/equity ratios. 
B) a positive relationship between companies with high non-debt tax shields and companies with high debt/equity ratios. 
C) a positive relationship between companies with high non-debt tax shields and companies with low debt/equity ratios. 
D) a positive relationship between companies with low non-debt tax shields and companies with low debt/equity ratios.

Question 2

Companies that rely heavily on share issues tend to be:

Accepted Answer

A) small,risky and value-based. 
B) large,risky and growing rapidly. 
C) small,relatively less risky and growing rapidly. 
D) none of the given options. 
A) small,risky and value-based. 
B) large,risky and growing rapidly. 
C) small,relatively less risky and growing rapidly. 
D) none of the given options.

Question 3

Non-debt tax shields can be best defined as:

Accepted Answer

A) tax deductions for interest costs. 
B) tax deductions for items such as investment tax credits and tax losses carried forward. 
C) the relationship between leverage and taxes. 
D) none of the given options. 
A) tax deductions for interest costs. 
B) tax deductions for items such as investment tax credits and tax losses carried forward. 
C) the relationship between leverage and taxes. 
D) none of the given options.

Question 4

The principle that should guide the financial manager in determining a financing strategy is that:

Accepted Answer

A) it is not as easy to add value by making good investment decisions as it is by making good financing decisions. 
B) while it is not easy to add value by making good investment decisions,it is certainly possible to reduce value by making poor investment decisions. 
C) it is not as easy to add value by making good investment decisions as it is by making good financing decisions but it is certainly possible to reduce value by making poor investment decisions. 
D) None of the given options. 
A) it is not as easy to add value by making good investment decisions as it is by making good financing decisions. 
B) while it is not easy to add value by making good investment decisions,it is certainly possible to reduce value by making poor investment decisions. 
C) it is not as easy to add value by making good investment decisions as it is by making good financing decisions but it is certainly possible to reduce value by making poor investment decisions. 
D) None of the given options.

Question 5

Which of the following companies is likely to find that debt is very costly?

Accepted Answer

A) A company with a lack of intangible assets. 
B) A company with considerable growth opportunities. 
C) A company with less growth opportunities. 
D) None of the given options. 
A) A company with a lack of intangible assets. 
B) A company with considerable growth opportunities. 
C) A company with less growth opportunities. 
D) None of the given options.

Question 6

Studies that seek to provide evidence of the determinants of capital structure may be criticised on the grounds that:

Accepted Answer

A) statistical significance has not been found in these studies. 
B) the determinants are not consistent with the theory. 
C) they provide direct tests of capital structure theory. 
D) they do not necessarily imply that leverage affects company value. 
A) statistical significance has not been found in these studies. 
B) the determinants are not consistent with the theory. 
C) they provide direct tests of capital structure theory. 
D) they do not necessarily imply that leverage affects company value.

Question 7

Which of the following statements with regard to tax is true?

Accepted Answer

A) Under a full imputation tax system,the effects of corporate and personal taxes can offset each other exactly. 
B) Under a classical tax system,any advantage from reducing company tax would be due only to differences in the timing of tax payments. 
C) Under a classical tax system,any net tax advantage of corporate borrowing is likely to go only to companies with high and stable earnings. 
D) In order for residential shareholders to benefit under a full imputation tax system,the wastage of tax credits must be reduced. 
A) Under a full imputation tax system,the effects of corporate and personal taxes can offset each other exactly. 
B) Under a classical tax system,any advantage from reducing company tax would be due only to differences in the timing of tax payments. 
C) Under a classical tax system,any net tax advantage of corporate borrowing is likely to go only to companies with high and stable earnings. 
D) In order for residential shareholders to benefit under a full imputation tax system,the wastage of tax credits must be reduced.

Question 8

Which of the following statements is false?

Accepted Answer

A) Most of the investment by non-financial companies is generally financed from internal cash flow. 
B) Some companies effectively have negative debt/equity ratios because their holdings of cash and marketable securities are greater than their debt. 
C) Wald (1999)found that differences in leverage between major industrial countries are moderate. 
D) Many studies of capital structure include measures of non-debt tax shields with the expectation that they will be positively related to leverage. 
A) Most of the investment by non-financial companies is generally financed from internal cash flow. 
B) Some companies effectively have negative debt/equity ratios because their holdings of cash and marketable securities are greater than their debt. 
C) Wald (1999)found that differences in leverage between major industrial countries are moderate. 
D) Many studies of capital structure include measures of non-debt tax shields with the expectation that they will be positively related to leverage.

Question 9

The pecking order theory identifies a target debt-equity ratio.

Accepted Answer

A) True 
 B)False

Question 10

Direct costs of financial distress are small,relative to company value,however the indirect costs are considered to be significantly larger.

Accepted Answer

A) True 
 B)False

Question 11

Graham (1996)found that changes in long-term debt are positively related to the company's:

Accepted Answer

A) tax rate. 
B) average tax rate. 
C) marginal tax rate. 
D) effective marginal tax rate. 
A) tax rate. 
B) average tax rate. 
C) marginal tax rate. 
D) effective marginal tax rate.

Question 12

Which of the following statements is true?

Accepted Answer

A) Lenders will charge a higher interest rate if the company has a high proportion of company-specific assets. 
B) The variability of the net cash flows from a company's assets is taken as a measure of its financial risk. 
C) The optimal capital structure will not be affected by its business risk. 
D) Lenders will charge a higher interest rate if the company has a high proportion of company-specific assets and the optimal capital structure will be affected by its business risk. 
A) Lenders will charge a higher interest rate if the company has a high proportion of company-specific assets. 
B) The variability of the net cash flows from a company's assets is taken as a measure of its financial risk. 
C) The optimal capital structure will not be affected by its business risk. 
D) Lenders will charge a higher interest rate if the company has a high proportion of company-specific assets and the optimal capital structure will be affected by its business risk.

Question 13

Which of the following statements is consistent with the pecking order theory?

Accepted Answer

A) A positive relationship exists between leverage and profitability. 
B) For any given level of investment,less profitable firms will borrow more than highly profitable firms. 
C) For any given level of investment,less profitable firms will borrow less than highly profitable firms. 
D) The level of debt in a firm's capital structure is dependent upon the number of tax shield substitutes. 
A) A positive relationship exists between leverage and profitability. 
B) For any given level of investment,less profitable firms will borrow more than highly profitable firms. 
C) For any given level of investment,less profitable firms will borrow less than highly profitable firms. 
D) The level of debt in a firm's capital structure is dependent upon the number of tax shield substitutes.

Question 14

In a survey on managers' perceptions of capital structure,it was found that their reluctance to issue new ordinary shares appeared to vary over time,depending on the recent price behaviour of the company's shares.This evidence is consistent with:

Accepted Answer

A) the tax deductibility of interest. 
B) the pecking order theory. 
C) the financial distress theory. 
D) any theory of capital structure. 
A) the tax deductibility of interest. 
B) the pecking order theory. 
C) the financial distress theory. 
D) any theory of capital structure.

Question 15

The trade-off theory cannot explain:

Accepted Answer

A) why companies are generally expansive in using debt finance. 
B) why evidence suggests that leverage is positively related to profitability. 
C) why financial leverage is similar,on average,across many countries despite differences in their tax systems. 
D) all of the given options. 
A) why companies are generally expansive in using debt finance. 
B) why evidence suggests that leverage is positively related to profitability. 
C) why financial leverage is similar,on average,across many countries despite differences in their tax systems. 
D) all of the given options.

Question 16

A company may raise funds at a lower cost than otherwise would be the case if:

Accepted Answer

A) it can design a security that focuses on the disequilibrium that exists between investor demands and the supply of securities. 
B) it issues securities that have been in short supply in the market indefinitely. 
C) it issues a particular security at a discount. 
D) it issues a particular security at a premium. 
A) it can design a security that focuses on the disequilibrium that exists between investor demands and the supply of securities. 
B) it issues securities that have been in short supply in the market indefinitely. 
C) it issues a particular security at a discount. 
D) it issues a particular security at a premium.

Question 17

Similarities in capital structure can be expected between companies in the same industry since:

Accepted Answer

A) they tend to face the same variability in cash flows. 
B) they tend to replicate each other's policies. 
C) they are faced with the same industry legislation. 
D) management is often on each other's boards of directors. 
A) they tend to face the same variability in cash flows. 
B) they tend to replicate each other's policies. 
C) they are faced with the same industry legislation. 
D) management is often on each other's boards of directors.

Question 18

The trade-off theory of capital structure implies that:

Accepted Answer

A) companies increase the amount of debt to achieve an optimal capital structure. 
B) companies move toward an optimal capital structure whether debt is increased or decreased. 
C) companies decrease the amount of debt to achieve an optimal capital structure. 
D) companies decrease the amount of debt in their capital structure in response to legislation that will decrease liquidation costs. 
A) companies increase the amount of debt to achieve an optimal capital structure. 
B) companies move toward an optimal capital structure whether debt is increased or decreased. 
C) companies decrease the amount of debt to achieve an optimal capital structure. 
D) companies decrease the amount of debt in their capital structure in response to legislation that will decrease liquidation costs.

Question 19

Schulman et al.(1996)examined the effects of imputation on corporate leverage in Canada.Which of the following statements is true of their results?

Accepted Answer

A) The tax changes provide significant benefit for low-dividend companies. 
B) High-dividend companies experience a significant increase in leverage. 
C) There is only a small effect on the leverage of companies that experienced an operating loss during the study period. 
D) None of the given options. 
A) The tax changes provide significant benefit for low-dividend companies. 
B) High-dividend companies experience a significant increase in leverage. 
C) There is only a small effect on the leverage of companies that experienced an operating loss during the study period. 
D) None of the given options.

Question 20

A survey of financial managers by Allen (1991)found that:

Accepted Answer

A) the vast majority of Australian companies,as opposed to US companies,do not have a policy of maintaining a substantial 'cushion' of reserve borrowing capacity. 
B) financial slack is valuable for all companies. 
C) Australian companies,on average,have considerably more financial slack than the expansive US companies. 
D) None of the given options is applicable. 
A) the vast majority of Australian companies,as opposed to US companies,do not have a policy of maintaining a substantial 'cushion' of reserve borrowing capacity. 
B) financial slack is valuable for all companies. 
C) Australian companies,on average,have considerably more financial slack than the expansive US companies. 
D) None of the given options is applicable.

Exam 13: Capital Structure Decisions

According to the tax shield hypothesis,we should expect to find:

Companies that rely heavily on share issues tend to be:

Non-debt tax shields can be best defined as:

The principle that should guide the financial manager in determining a financing strategy is that:

Which of the following companies is likely to find that debt is very costly?

Studies that seek to provide evidence of the determinants of capital structure may be criticised on the grounds that:

Which of the following statements with regard to tax is true?

Which of the following statements is false?

The pecking order theory identifies a target debt-equity ratio.

Direct costs of financial distress are small,relative to company value,however the indirect costs are considered to be significantly larger.

Graham (1996)found that changes in long-term debt are positively related to the company's:

Which of the following statements is true?

Which of the following statements is consistent with the pecking order theory?

In a survey on managers' perceptions of capital structure,it was found that their reluctance to issue new ordinary shares appeared to vary over time,depending on the recent price behaviour of the company's shares.This evidence is consistent with:

The trade-off theory cannot explain:

A company may raise funds at a lower cost than otherwise would be the case if:

Similarities in capital structure can be expected between companies in the same industry since:

The trade-off theory of capital structure implies that:

Schulman et al.(1996)examined the effects of imputation on corporate leverage in Canada.Which of the following statements is true of their results?

A survey of financial managers by Allen (1991)found that:

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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