Question 1

Why is debt often referred to as leverage in finance?

Accepted Answer

A) Debt magnifies the firm's total asset turnover. 
B) Debt magnifies both the potential returns and the risk to bondholders. 
C) Debt magnifies both the potential returns and the risk to equity holders. 
D) None of these. 
A) Debt magnifies the firm's total asset turnover. 
B) Debt magnifies both the potential returns and the risk to bondholders. 
C) Debt magnifies both the potential returns and the risk to equity holders. 
D) None of these. C

Question 2

Your company has a 38 percent tax rate and has $800 million in assets,currently financed entirely with equity.Equity is worth $60 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 shown as follows:
The firm is considering switching to a 20 percent debt capital structure,and has determined that they would have to pay a 10 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) $1.98 
B) $2.29 
C) $2.36 
D) $2.44 
A) $1.98 
B) $2.29 
C) $2.36 
D) $2.44 D

Question 3

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 shown as follows:
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 D

Question 4

What two main factors come into play when a firm is deciding to change its funding mix with regard to their capital structure?

Accepted Answer

1.Whether debt interest payments are tax

Question 5

All of the following are examples of the costs of financial distress EXCEPT:

Accepted Answer

A) excellent employees find employment elsewhere. 
B) suppliers are reluctant to sell on credit to the firm. 
C) other firms will be less likely to offer the firm partnering opportunities. 
D) All of these are examples of the costs of financial distress. 
A) excellent employees find employment elsewhere. 
B) suppliers are reluctant to sell on credit to the firm. 
C) other firms will be less likely to offer the firm partnering opportunities. 
D) All of these are examples of the costs of financial distress.

Question 6

Which of the following is one of the most extreme examples of firm re-leveraging that occurs when someone uses a firm's debt capacity to buy out the majority of the firm's equity holders?

Accepted Answer

A) Debt buyout 
B) Equity buyout 
C) Leveraged buyout 
D) Separation buyout 
A) Debt buyout 
B) Equity buyout 
C) Leveraged buyout 
D) Separation buyout

Question 7

Suppose that a company's equity is currently selling for $20 per share and that there are 2 million shares outstanding.If the firm also has 8 thousand bonds outstanding,which are selling at 99 percent of par ($1,000),what are the firm's current capital structure weights for equity and debt respectively?

Accepted Answer

A) 50 percent, 50 percent 
B) 16.81 percent, 83.19 percent 
C) 83.47 percent, 16.53 percent 
D) 83.33 percent, 16.67 percent 
A) 50 percent, 50 percent 
B) 16.81 percent, 83.19 percent 
C) 83.47 percent, 16.53 percent 
D) 83.33 percent, 16.67 percent

Question 8

Which of the following is a true statement?

Accepted Answer

A) Sectors of the U.S.economy that tend to have quite variable income streams also carry the highest D/E ratios. 
B) Sectors of the U.S.economy that tend to have quite variable income streams also carry the lowest D/E ratios. 
C) Conglomerates tend to have high, unstable income streams. 
D) Utilities have variable income streams and carry low D/E ratios. 
A) Sectors of the U.S.economy that tend to have quite variable income streams also carry the highest D/E ratios. 
B) Sectors of the U.S.economy that tend to have quite variable income streams also carry the lowest D/E ratios. 
C) Conglomerates tend to have high, unstable income streams. 
D) Utilities have variable income streams and carry low D/E ratios.

Question 9

Which of the following is NOT a factor for determining whether to use the active or passive approach to capital structure changes?

Accepted Answer

A) How much the firm faces in flotation costs under the active management approach 
B) How much the firm faces in debt costs under the active management approach 
C) How quickly the firm is growing 
D) How strongly and how quickly they wish to change the capital structure 
A) How much the firm faces in flotation costs under the active management approach 
B) How much the firm faces in debt costs under the active management approach 
C) How quickly the firm is growing 
D) How strongly and how quickly they wish to change the capital structure

Question 10

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 shown as follows:
The firm is considering switching to a 40 percent debt capital structure,and has determined that they would have to pay a 15 percent yield on perpetual debt.What will be the break-even level of EBIT?

Accepted Answer

A) $11.2 million 
B) $9.5 million 
C) $13.0 million 
D) $15.0 million 
A) $11.2 million 
B) $9.5 million 
C) $13.0 million 
D) $15.0 million

Question 11

Which of the following allows for two types of bankruptcy for which most businesses can file?

Accepted Answer

A) Securities Exchange Commission 
B) Generally Accepted Accounting Principles 
C) The Internal Revenue Service 
D) The United States Bankruptcy Code 
A) Securities Exchange Commission 
B) Generally Accepted Accounting Principles 
C) The Internal Revenue Service 
D) The United States Bankruptcy Code

Question 12

A firm faces a 30 percent tax rate and has $500m in assets,currently financed entirely with equity.Equity is worth $100 per share,and book value of equity is equal to market value of equity.Also,let's assume that the firm's expected EBIT is $70m.The firm is considering switching to an 18 percent debt capital structure,and has determined that they would have to pay an 8 percent yield on perpetual debt.How much will ROE change if they switch to the proposed capital structure?

Accepted Answer

A) There will be no change in the firm's ROE. 
B) The ROE will decrease by 0.52 percent. 
C) The ROE will increase by 1.58 percent. 
D) The ROE will increase by 0.92 percent. 
A) There will be no change in the firm's ROE. 
B) The ROE will decrease by 0.52 percent. 
C) The ROE will increase by 1.58 percent. 
D) The ROE will increase by 0.92 percent.

Question 13

Your company has a 38% tax rate and has $800 million in assets,currently financed entirely with equity.Equity is worth $60 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 shown as follows:
The firm is considering switching to a 20 percent debt capital structure,and has determined that they would have to pay a 10 percent yield on perpetual debt in either event.What will be the standard deviation in EPS if they switch to the proposed capital structure?

Accepted Answer

A) 1.53 
B) 2.35 
C) 3.32 
D) 11.04 
A) 1.53 
B) 2.35 
C) 3.32 
D) 11.04

Question 14

Your company has a 38 percent tax rate and has $800 million in assets,currently financed entirely with equity.Equity is worth $60 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 shown as follows:
The firm is considering switching to a 20 percent debt capital structure,and has determined that they would have to pay a 10 percent yield on perpetual debt in either event.What will be the break-even level of EBIT?

Accepted Answer

A) $26.67 million 
B) $50 million 
C) $56.67 million 
D) $80.1 million 
A) $26.67 million 
B) $50 million 
C) $56.67 million 
D) $80.1 million

Question 15

Your company has a 40 percent tax rate and has $750 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 shown as follows:
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) $8.56 
B) $8.84 
C) $8.88 
D) $25.67 
A) $8.56 
B) $8.84 
C) $8.88 
D) $25.67

Question 16

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 shown as follows:
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 standard deviation in EPS if they switch to the proposed capital structure?

Accepted Answer

A) $4.12 
B) $14.57 
C) $15.82 
D) $15.09 
A) $4.12 
B) $14.57 
C) $15.82 
D) $15.09

Question 17

In M&M's perfect world,will the debt holders ever bear any of the risk of the firm?

Accepted Answer

No.If there is no chance of ba

Question 18

Which of the following statements is correct?

Accepted Answer

A) Adding corporate taxes to the M&M model reduces both the level and volatility of EPS. 
B) Adding corporate taxes to the M&M model has no impact on the level and volatility of EPS. 
C) Adding corporate taxes to the M&M model increases both the level and volatility of EPS. 
D) None of these statements are correct. 
A) Adding corporate taxes to the M&M model reduces both the level and volatility of EPS. 
B) Adding corporate taxes to the M&M model has no impact on the level and volatility of EPS. 
C) Adding corporate taxes to the M&M model increases both the level and volatility of EPS. 
D) None of these statements are correct.

Question 19

Your company faces a 34 percent 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 shown as follows:
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 20

Which type of bankruptcy involves an attempt to allow the firm to reorganize the business under court supervision?

Accepted Answer

A) Chapter 7 
B) Chapter 11 
C) Chapter 13 
D) Chapter 9 
A) Chapter 7 
B) Chapter 11 
C) Chapter 13 
D) Chapter 9

Why is debt often referred to as leverage in finance?

What two main factors come into play when a firm is deciding to change its funding mix with regard to their capital structure?

All of the following are examples of the costs of financial distress EXCEPT:

Which of the following is one of the most extreme examples of firm re-leveraging that occurs when someone uses a firm's debt capacity to buy out the majority of the firm's equity holders?

Which of the following is a true statement?

Which of the following is NOT a factor for determining whether to use the active or passive approach to capital structure changes?

Which of the following allows for two types of bankruptcy for which most businesses can file?

In M&M's perfect world,will the debt holders ever bear any of the risk of the firm?

Which of the following statements is correct?

Which type of bankruptcy involves an attempt to allow the firm to reorganize the business under court supervision?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money

Time Value of Money

Valuing Bonds

Valuing Stockspart

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 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

Why is debt often referred to as leverage in finance?

What two main factors come into play when a firm is deciding to change its funding mix with regard to their capital structure?

All of the following are examples of the costs of financial distress EXCEPT:

Which of the following is one of the most extreme examples of firm re-leveraging that occurs when someone uses a firm's debt capacity to buy out the majority of the firm's equity holders?

Which of the following is a true statement?

Which of the following is NOT a factor for determining whether to use the active or passive approach to capital structure changes?

Which of the following allows for two types of bankruptcy for which most businesses can file?

In M&M's perfect world,will the debt holders ever bear any of the risk of the firm?

Which of the following statements is correct?

Which type of bankruptcy involves an attempt to allow the firm to reorganize the business under court supervision?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money

Time Value of Money

Valuing Bonds

Valuing Stockspart

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 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