Question 1

Equity in a firm with debt is called:

Accepted Answer

A) risk-free equity. 
B) risky equity. 
C) shareholders' equity. 
D) unlevered equity. 
E) levered equity. 
A) risk-free equity. 
B) risky equity. 
C) shareholders' equity. 
D) unlevered equity. 
E) levered equity.

Question 2

A firm's ________ ratio is the fraction of the firm's total value that corresponds to debt.

Accepted Answer

A) debt-to-equity 
B) asset 
C) debt-to-value 
D) liability 
E) obligations 
A) debt-to-equity 
B) asset 
C) debt-to-value 
D) liability 
E) obligations

Question 3

What are direct costs of financial distress?

Accepted Answer

When a corporation becomes financially d

Question 4

A firm requires an investment of $40,000 and borrows $10,000 at 8%.If the return on equity is 20%,what is the firm's pre tax WACC?

Accepted Answer

A) 14% 
B) 15% 
C) 16% 
D) 17% 
E) 18% 
A) 14% 
B) 15% 
C) 16% 
D) 17% 
E) 18%

Question 5

Managers should consider ________ for external financing when agency costs are significant.

Accepted Answer

A) long-term debt 
B) retained earnings 
C) internal equity 
D) short-term debt 
E) preferred stock 
A) long-term debt 
B) retained earnings 
C) internal equity 
D) short-term debt 
E) preferred stock

Question 6

What are the issues in determining the present value (PV)of financial distress?

Accepted Answer

Calculating the precise present value (P

Question 7

Suppose Blank Company has only one project,as forecast above,and an unlevered cost of equity of 8%.What is the value of the company?

Accepted Answer

A) $23,148.15 
B) $32,407.40 
C) $41,666.67 
D) $43,356.43 
E) $51,621.95 
A) $23,148.15 
B) $32,407.40 
C) $41,666.67 
D) $43,356.43 
E) $51,621.95

Question 8

The probability of financial distress depends on the:

Accepted Answer

A) likelihood that a firm will be unable to meet its debt commitments. 
B) chance that a firm's raw material costs will increase. 
C) likelihood of dividend payments. 
D) likelihood of asset growth. 
E) likelihood of issuing new debt. 
A) likelihood that a firm will be unable to meet its debt commitments. 
B) chance that a firm's raw material costs will increase. 
C) likelihood of dividend payments. 
D) likelihood of asset growth. 
E) likelihood of issuing new debt.

Question 9

Financial managers prefer to choose the same debt level no matter which industry they operate in.

Accepted Answer

A) True 
 B)False

Question 10

A firm requires an investment of $20,000,and will be financed with 50% equity and 50% debt.If the firm's debt cost of capital is 6%,and its return on equity is 15%,what is the firm's pre-tax WACC?

Accepted Answer

A) 10.5% 
B) 15% 
C) 6% 
D) 9% 
E) 21% 
A) 10.5% 
B) 15% 
C) 6% 
D) 9% 
E) 21%

Question 11

A firm requires an investment of $30,000 and borrows $15,000 at 6%.If the cost of equity is 18%,and the firm's WACC is 10.8%,what is the firm's tax rate?

Accepted Answer

A) 40% 
B) 35% 
C) 30% 
D) 45% 
E) 50% 
A) 40% 
B) 35% 
C) 30% 
D) 45% 
E) 50%

Question 12

Firms in industries such as real estate tend to have ________ distress costs because of a large proportion of tangible assets.

Accepted Answer

A) high 
B) low 
C) unexpected 
D) varying 
E) constant 
A) high 
B) low 
C) unexpected 
D) varying 
E) constant

Question 13

A financial manager makes a choice of the amount and source of capital based on how the choice will impact:

Accepted Answer

A) debt-equity ratio. 
B) debt value. 
C) earnings per share. 
D) firm value. 
E) profit. 
A) debt-equity ratio. 
B) debt value. 
C) earnings per share. 
D) firm value. 
E) profit.

Question 14

A firm has a market value of assets of $50,000.It borrows $10,000 at 7%.If the unlevered cost of equity is 15%,what is the firm's cost of equity capital?

Accepted Answer

A) 15% 
B) 16% 
C) 17% 
D) 18% 
E) 19% 
A) 15% 
B) 16% 
C) 17% 
D) 18% 
E) 19%

Question 15

Assume that in addition to 1.25 billion common shares outstanding,Luther has stock options given to employees valued at $2 billion.After the repurchase,how many shares will Luther have outstanding?

Accepted Answer

A) 1.0 billion 
B) 1.2 billion 
C) 0.75 billion 
D) 1.1 billion 
E) 1.25 billion 
A) 1.0 billion 
B) 1.2 billion 
C) 0.75 billion 
D) 1.1 billion 
E) 1.25 billion

Question 16

Aside from direct costs of bankruptcy,a firm may also incur other indirect costs such as:

Accepted Answer

A) loss of customers and loss of suppliers. 
B) loss of interest receipts. 
C) loss of dividend receipts. 
D) increase in raw material costs. 
E) increase in salvage costs. 
A) loss of customers and loss of suppliers. 
B) loss of interest receipts. 
C) loss of dividend receipts. 
D) increase in raw material costs. 
E) increase in salvage costs.

Question 17

When a firm commits to large future debt payments to convince the stock market it has great projects,this is an example of:

Accepted Answer

A) market timing. 
B) adverse selection. 
C) the pecking order hypothesis. 
D) the agency cost of debt. 
E) the signalling theory of debt. 
A) market timing. 
B) adverse selection. 
C) the pecking order hypothesis. 
D) the agency cost of debt. 
E) the signalling theory of debt.

Question 18

What is the capital structure of a firm?

Accepted Answer

The relative proport

Question 19

In general,issuing equity may not dilute the ownership of existing shareholders if:

Accepted Answer

A) the value of new shares is equal to the value of debt. 
B) the new shares are sold at a fair price. 
C) the firm has no debt financing. 
D) the firm uses debt conservatively. 
E) the original owners do not sell their shares. 
A) the value of new shares is equal to the value of debt. 
B) the new shares are sold at a fair price. 
C) the firm has no debt financing. 
D) the firm uses debt conservatively. 
E) the original owners do not sell their shares.

Question 20

With perfect capital markets,the total value of a firm should not depend on its capital structure.

Accepted Answer

A) True 
 B)False

Exam 16: Capital Structure

Equity in a firm with debt is called:

A firm's ________ ratio is the fraction of the firm's total value that corresponds to debt.

What are direct costs of financial distress?

A firm requires an investment of $40,000 and borrows $10,000 at 8%.If the return on equity is 20%,what is the firm's pre tax WACC?

Managers should consider ________ for external financing when agency costs are significant.

What are the issues in determining the present value (PV)of financial distress?

Suppose Blank Company has only one project,as forecast above,and an unlevered cost of equity of 8%.What is the value of the company?

The probability of financial distress depends on the:

Financial managers prefer to choose the same debt level no matter which industry they operate in.

A firm requires an investment of $20,000,and will be financed with 50% equity and 50% debt.If the firm's debt cost of capital is 6%,and its return on equity is 15%,what is the firm's pre-tax WACC?

A firm requires an investment of $30,000 and borrows $15,000 at 6%.If the cost of equity is 18%,and the firm's WACC is 10.8%,what is the firm's tax rate?

Firms in industries such as real estate tend to have ________ distress costs because of a large proportion of tangible assets.

A financial manager makes a choice of the amount and source of capital based on how the choice will impact:

A firm has a market value of assets of $50,000.It borrows $10,000 at 7%.If the unlevered cost of equity is 15%,what is the firm's cost of equity capital?

Assume that in addition to 1.25 billion common shares outstanding,Luther has stock options given to employees valued at $2 billion.After the repurchase,how many shares will Luther have outstanding?

Aside from direct costs of bankruptcy,a firm may also incur other indirect costs such as:

When a firm commits to large future debt payments to convince the stock market it has great projects,this is an example of:

What is the capital structure of a firm?

In general,issuing equity may not dilute the ownership of existing shareholders if:

With perfect capital markets,the total value of a firm should not depend on its capital structure.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters