Question 1

Because debtor-in-possession (DIP)financing is senior to all existing creditors:

Accepted Answer

A) it allows a firm that has filed for bankruptcy renewed access to financing to keep operating. 
B) it is an important cost for firms that rely heavily on trade credit. 
C) it is likely to be small for producers of raw materials,as the value of those goods,once delivered,does not depend on the seller's continued success. 
D) it allows debtors to assume they may have an opportunity to avoid their obligations to a firm. 
A) it allows a firm that has filed for bankruptcy renewed access to financing to keep operating. 
B) it is an important cost for firms that rely heavily on trade credit. 
C) it is likely to be small for producers of raw materials,as the value of those goods,once delivered,does not depend on the seller's continued success. 
D) it allows debtors to assume they may have an opportunity to avoid their obligations to a firm.

Question 2

Which of the following statements is FALSE?

Accepted Answer

A) The optimal level of debt D*,balances the costs and benefits of leverage. 
B) As the debt level increases,the firm benefits from the interest tax shield (which has present value τ*
D) . 
C) If the debt level is too large firm value is reduced due to the loss of tax benefits (when interest exceeds EBIT),financial distress costs,and the agency costs of leverage. 
D) As the debt level increases,the firm faces worse incentives for management,which increase wasteful investment and perks. 
A) The optimal level of debt D*,balances the costs and benefits of leverage. 
B) As the debt level increases,the firm benefits from the interest tax shield (which has present value τ*
D) . 
C) If the debt level is too large firm value is reduced due to the loss of tax benefits (when interest exceeds EBIT),financial distress costs,and the agency costs of leverage. 
D) As the debt level increases,the firm faces worse incentives for management,which increase wasteful investment and perks.

Question 3

Which of the following is unlikely to influence a firm's choice of capital structure?

Accepted Answer

A) Taxes 
B) Agency costs and benefits of leverage 
C) Transaction costs 
D) All of the above influence capital structure decisions. 
A) Taxes 
B) Agency costs and benefits of leverage 
C) Transaction costs 
D) All of the above influence capital structure decisions.

Question 4

Which of the following statements is FALSE?

Accepted Answer

A) Real estate firms are likely to have low costs of financial distress,as much of their value derives from assets that can be sold relatively easily. 
B) For low levels of debt,the risk of default remains low and the main effect of an increase in leverage is an increase in the interest tax shield,which has present value τ*D,where τ* is the effective tax advantage of debt. 
C) Firms whose value and cash flows are very volatile (for example,semiconductor firms)must have much higher levels of debt to avoid a significant risk of default. 
D) The probability of financial distress depends on the likelihood that a firm will be unable to meet its debt commitments and therefore default. 
A) Real estate firms are likely to have low costs of financial distress,as much of their value derives from assets that can be sold relatively easily. 
B) For low levels of debt,the risk of default remains low and the main effect of an increase in leverage is an increase in the interest tax shield,which has present value τ*D,where τ* is the effective tax advantage of debt. 
C) Firms whose value and cash flows are very volatile (for example,semiconductor firms)must have much higher levels of debt to avoid a significant risk of default. 
D) The probability of financial distress depends on the likelihood that a firm will be unable to meet its debt commitments and therefore default.

Question 5

Assume that in the event of default,20% of the value of MI's assets will be lost in bankruptcy costs and suppose that MI has zero-coupon debt with a $125 million face value due next year.The present value of MI's financial distress costs is closest to:

Accepted Answer

A) $20.0 million 
B) $6.6 million 
C) $6.3 million 
D) $19.0 million 
A) $20.0 million 
B) $6.6 million 
C) $6.3 million 
D) $19.0 million

Question 6

Use the information for the question(s)below.
If it is managed efficiently,Luther industries will have assets with market value of $100 million,$300,million,or $500 million next year,with each outcome being equally likely.Managers may,however,engage in wasteful empire building which will reduce the firm's market value by $20 million in all cases.Managers may also increase the risk of the firm,changing the probability of each outcome to 50%,20%,and 30% respectively.
-If it is managed efficiently,then the expected market value of Luther's assets is closest to:

Accepted Answer

A) $300 million 
B) $260 
C) $240 
D) $280 million 
A) $300 million 
B) $260 
C) $240 
D) $280 million

Question 7

Use the information for the question(s)below.
Big Blue Banana (BBB)is a clothing retailer with a current share price of $10.00 and with 25 million shares outstanding.Suppose that Big Blue Banana announces plans to lower its corporate taxes by borrowing $100 million and using the proceeds to repurchase shares.
-Assuming perfect capital markets,the share price for BBB after this announcement is closest to:

Accepted Answer

A) $11.40 
B) $10.85 
C) $10.00 
D) $8.60 
A) $11.40 
B) $10.85 
C) $10.00 
D) $8.60

Question 8

Suppose that MI has zero-coupon debt with a $125 million face value due next year.The yield to maturity of MI's debt is closest to:

Accepted Answer

A) 12.5% 
B) 7.8% 
C) 25.0% 
D) 5.0% 
A) 12.5% 
B) 7.8% 
C) 25.0% 
D) 5.0%

Question 9

Which of the following firms is likely to maintain low levels of debt?

Accepted Answer

A) An electric utility 
B) A tobacco company 
C) An Internet firm 
D) A mature restaurant chain 
A) An electric utility 
B) A tobacco company 
C) An Internet firm 
D) A mature restaurant chain

Question 10

Suppose that BBB pays corporate taxes of 35% and that shareholders expects the change in debt to be permanent.Assuming that capital markets are perfect except for the existence of corporate taxes,the share price for BBB after this announcement is closest to:

Accepted Answer

A) $10.00 
B) $10.85 
C) $8.60 
D) $11.40 
A) $10.00 
B) $10.85 
C) $8.60 
D) $11.40

Question 11

Which of the following is NOT a direct cost of bankruptcy?

Accepted Answer

A) Costs to creditors 
B) Investment banking costs 
C) Costs of accounting experts 
D) Legal costs and fees 
A) Costs to creditors 
B) Investment banking costs 
C) Costs of accounting experts 
D) Legal costs and fees

Because debtor-in-possession (DIP)financing is senior to all existing creditors:

Which of the following statements is FALSE?

Which of the following is unlikely to influence a firm's choice of capital structure?

Which of the following statements is FALSE?

Assume that in the event of default,20% of the value of MI's assets will be lost in bankruptcy costs and suppose that MI has zero-coupon debt with a $125 million face value due next year.The present value of MI's financial distress costs is closest to:

Suppose that MI has zero-coupon debt with a $125 million face value due next year.The yield to maturity of MI's debt is closest to:

Which of the following firms is likely to maintain low levels of debt?

Suppose that BBB pays corporate taxes of 35% and that shareholders expects the change in debt to be permanent.Assuming that capital markets are perfect except for the existence of corporate taxes,the share price for BBB after this announcement is closest to:

Which of the following is NOT a direct cost of bankruptcy?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

Exam 16: Financial Distress,managerial Incentives,and Information

Because debtor-in-possession (DIP)financing is senior to all existing creditors:

Which of the following statements is FALSE?

Which of the following is unlikely to influence a firm's choice of capital structure?

Which of the following statements is FALSE?

Assume that in the event of default,20% of the value of MI's assets will be lost in bankruptcy costs and suppose that MI has zero-coupon debt with a $125 million face value due next year.The present value of MI's financial distress costs is closest to:

Suppose that MI has zero-coupon debt with a $125 million face value due next year.The yield to maturity of MI's debt is closest to:

Which of the following firms is likely to maintain low levels of debt?

Suppose that BBB pays corporate taxes of 35% and that shareholders expects the change in debt to be permanent.Assuming that capital markets are perfect except for the existence of corporate taxes,the share price for BBB after this announcement is closest to:

Which of the following is NOT a direct cost of bankruptcy?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters