Question 1

Consider the following equation for the question(s) below.
  
-The E in the equation above represents ________.

Accepted Answer

A)  the value of the firm's equity 
B)  the value of the firm's debt 
C)  the value of the firm's unlevered equity 
D)  the market value of the firm's assets 
A)  the value of the firm's equity 
B)  the value of the firm's debt 
C)  the value of the firm's unlevered equity 
D)  the market value of the firm's assets

Question 2

The pecking order hypothesis states that managers will have a preference to fund investment by using ________, followed by ________, and will issue ________ as a last resort.

Accepted Answer

A)  debt, equity, retained earnings 
B)  retained earnings, equity, debt 
C)  retained earnings, debt, equity 
D)  debt, retained earnings, equity 
A)  debt, equity, retained earnings 
B)  retained earnings, equity, debt 
C)  retained earnings, debt, equity 
D)  debt, retained earnings, equity

Question 3

A firm that does not have trouble meeting its debt obligations is said to be in financial distress.

Accepted Answer

A) True 
 B)False

Question 4

A bankruptcy process is complex, time-consuming, and costly. The costs of bankruptcy include ________.

Accepted Answer

A)  dividend payments 
B)  raw material costs 
C)  costs of hiring legal experts, appraisers, and auctioneers 
D)  taxes 
A)  dividend payments 
B)  raw material costs 
C)  costs of hiring legal experts, appraisers, and auctioneers 
D)  taxes

Question 5

Use the information for the question(s) below.
Consider two firms, Firm X and Firm Y, that have identical assets that generate identical cash flows. Firm Y is an all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. Firm X has 2 million shares outstanding and $12 million in debt at an interest rate of 5%.
-According to MM Proposition I, the stock price for Firm X is closest to ________.

Accepted Answer

A)  $8.00 
B)  $24.00 
C)  $6.00 
D)  $12.00 
A)  $8.00 
B)  $24.00 
C)  $6.00 
D)  $12.00

Question 6

A firm requires an investment of $60,000 and borrows $20,000 at 8%. If the return on equity is 14% and the tax rate is 30%, what is the firm's WACC?

Accepted Answer

A)  11.2% 
B)  9.0% 
C)  13.4% 
D)  22.4% 
A)  11.2% 
B)  9.0% 
C)  13.4% 
D)  22.4%

Question 7

Managers should not change the capital structure unless it departs significantly from the optimal level because such a change would ________.

Accepted Answer

A)  reduce dividends 
B)  incur transactions costs 
C)  increase fixed costs 
D)  change incentives of stakeholders 
A)  reduce dividends 
B)  incur transactions costs 
C)  increase fixed costs 
D)  change incentives of stakeholders

Question 8

Asymmetric information implies that ________ may have better information about a firm's cash flows than other stakeholders.

Accepted Answer

A)  debt holders 
B)  suppliers 
C)  managers 
D)  creditors 
A)  debt holders 
B)  suppliers 
C)  managers 
D)  creditors

Question 9

As the level of debt increases the tax benefits of debt increase until ________.

Accepted Answer

A)  interest costs exceed dividend payments 
B)  tax shield benefit exceeds distress costs 
C)  raw material costs exceed dividend payments 
D)  employee costs exceed interest expense 
A)  interest costs exceed dividend payments 
B)  tax shield benefit exceeds distress costs 
C)  raw material costs exceed dividend payments 
D)  employee costs exceed interest expense

Question 10

Agency costs arise when ________.

Accepted Answer

A)  there are high labor costs 
B)  input costs are higher than interest costs 
C)  interest costs exceed dividend payments 
D)  conflicts of interest exist between stakeholders 
A)  there are high labor costs 
B)  input costs are higher than interest costs 
C)  interest costs exceed dividend payments 
D)  conflicts of interest exist between stakeholders

Question 11

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

Question 12

Market timing means that managers may sell ________ when they believe the stock is over-valued and rely on ________ when the stock is undervalued.

Accepted Answer

A)  debt, shares 
B)  debt, preferred stock 
C)  new shares, debt 
D)  debt, debt 
A)  debt, shares 
B)  debt, preferred stock 
C)  new shares, debt 
D)  debt, debt

Question 13

A firm has a market value of equity of $30,000. It borrows $7500 at 8%. If the unlevered cost of equity is 15%, what is the firm's cost of equity capital?

Accepted Answer

A)  16.75% 
B)  6.70% 
C)  20.10% 
D)  23.45% 
A)  16.75% 
B)  6.70% 
C)  20.10% 
D)  23.45%

Question 14

What are some implications of market imperfections?

Accepted Answer

Market imperfections such as c

Question 15

The following equation:   can be used to calculate all of the following EXCEPT ________.

Accepted Answer

A)  the cost of capital for a firm's assets 
B)  the levered cost of preferred equity 
C)  the unlevered cost of equity 
D)  the weighted average cost of capital 
A)  the cost of capital for a firm's assets 
B)  the levered cost of preferred equity 
C)  the unlevered cost of equity 
D)  the weighted average cost of capital

Question 16

Consider the following equation for the question(s) below.
  
-The U in the equation above represents ________.

Accepted Answer

A)  the value of the firm's equity 
B)  the market value of the firm's assets 
C)  the value of the firm's unlevered equity 
D)  the value of the firm's debt 
A)  the value of the firm's equity 
B)  the market value of the firm's assets 
C)  the value of the firm's unlevered equity 
D)  the value of the firm's debt

Question 17

Use the information for the question(s) below.
Luther is a successful logistical services firm that currently has $5 billion in cash. Luther has decided to use this cash to repurchase shares from its investors and has already announced the stock repurchase plan. Currently Luther is an all-equity firm with 1.25 billion shares outstanding. Luther's shares are currently trading at $20 per share.
-With perfect capital markets, what is the market price per share of Luther's stock after the share repurchase?

Accepted Answer

A)  $20 
B)  $24 
C)  $15 
D)  $25 
A)  $20 
B)  $24 
C)  $15 
D)  $25

Question 18

Consider the following equation for the question(s) below.
  
-Which of the following statements is FALSE?

Accepted Answer

A)  With no debt, the WACC is equal to the unlevered equity cost of capital. 
B)  With perfect capital markets, a firm's WACC is dependent on its capital structure and is equal to its equity cost of capital only if the firm is unlevered. 
C)  As the firm borrows at the low cost of capital for debt, its equity cost of capital rises, but the net effect is that the firm's WACC is unchanged. 
D)  As debt has a lower cost of capital than equity, higher leverage lowers a firm's WACC. 
A)  With no debt, the WACC is equal to the unlevered equity cost of capital. 
B)  With perfect capital markets, a firm's WACC is dependent on its capital structure and is equal to its equity cost of capital only if the firm is unlevered. 
C)  As the firm borrows at the low cost of capital for debt, its equity cost of capital rises, but the net effect is that the firm's WACC is unchanged. 
D)  As debt has a lower cost of capital than equity, higher leverage lowers a firm's WACC.

Question 19

A firm will give a one-time cash flow of $24,000 after one year. If the project risk requires a return of 10%, what is the levered value of the firm with perfect capital markets?

Accepted Answer

A)  $17,454.55 
B)  $26,181.82 
C)  $21,818.18 
D)  more information needed 
A)  $17,454.55 
B)  $26,181.82 
C)  $21,818.18 
D)  more information needed

Question 20

A firm requires an investment of $20,000 and will return $26,500 after one year. If the firm borrows $6000 at 7%, what is the return on levered equity?

Accepted Answer

A)  35% 
B)  52% 
C)  43% 
D)  61% 
A)  35% 
B)  52% 
C)  43% 
D)  61%

Exam 16: Capital Structure

Consider the following equation for the question(s) below. -The E in the equation above represents ________.

The pecking order hypothesis states that managers will have a preference to fund investment by using ________, followed by ________, and will issue ________ as a last resort.

A firm that does not have trouble meeting its debt obligations is said to be in financial distress.

A bankruptcy process is complex, time-consuming, and costly. The costs of bankruptcy include ________.

A firm requires an investment of $60,000 and borrows $20,000 at 8%. If the return on equity is 14% and the tax rate is 30%, what is the firm's WACC?

Managers should not change the capital structure unless it departs significantly from the optimal level because such a change would ________.

Asymmetric information implies that ________ may have better information about a firm's cash flows than other stakeholders.

As the level of debt increases the tax benefits of debt increase until ________.

Agency costs arise when ________.

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

Market timing means that managers may sell ________ when they believe the stock is over-valued and rely on ________ when the stock is undervalued.

A firm has a market value of equity of $30,000. It borrows $7500 at 8%. If the unlevered cost of equity is 15%, what is the firm's cost of equity capital?

What are some implications of market imperfections?

The following equation: can be used to calculate all of the following EXCEPT ________.

Consider the following equation for the question(s) below. -The U in the equation above represents ________.

Consider the following equation for the question(s) below. -Which of the following statements is FALSE?

A firm will give a one-time cash flow of $24,000 after one year. If the project risk requires a return of 10%, what is the levered value of the firm with perfect capital markets?

A firm requires an investment of $20,000 and will return $26,500 after one year. If the firm borrows $6000 at 7%, what is the return on levered equity?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters

The pecking order hypothesis states that managers will have a preference to fund investment by using , followed by , and will issue as a last resort.

Market timing means that managers may sell when they believe the stock is over-valued and rely on when the stock is undervalued.