Exam 14: Capital Structure and Dividend Policy Decisions

The fact that some managers are more aggressive in their use of debt financing in attempting to boost profits does not influence the optimal or value-maximizing capital structure.

One implication of information asymmetry between investors and firm managers is that if a firm raises new capital by issuing debt rather than by selling stock, it signals that the firm has very good prospects.

Which of the following is not one of the four primary factors that influence capital structure?

You are the president of a small, publicly-traded corporation.Since you believe that your firm's stock price is temporarily depressed, all additional capital funds required during the current year will be raised using debt.Thus, the appropriate marginal cost of capital for the current year is the after-tax cost of debt.

Which of the following statements is correct?

Business risk is concerned with the operations of the firm.Which of the following is not associated with (or not a part of) business risk?

A consistent supply of capital is essential for the long-run success of a firm.Although a firm may have access to capital under all types of economic conditions, the concept of financial flexibility implies that the firm can obtain capital on acceptable, competitive terms.

If Miller and Modigliani had considered the cost of bankruptcy, it is unlikely that they would have concluded that 100 percent debt financing is optimal for the firm.

The dividend irrelevance theory, proposed by Miller and Modigliani, says that as long as a firm pays a dividend, how much it pays does not affect either its cost of capital or its stock price.

If you know that your firm is facing relatively poor prospects but needs new capital, and you know that investors do not have this information, signaling theory would predict that you would

If the announcement of a stock sale does in fact trigger a decline in stock price, this reinforces the effects of flotation costs incurred with new equity issues.Further, this implies a larger break in the MCC schedule.

As long as a firm is near its target capital structure it will not have to concern itself with financial flexibility.

The optimal capital structure is the one that maximizes the price of the stock, which always calls for a debt/asset ratio that is lower than the one that maximizes EPS.

As the percentage of debt in a firm's capital structure increases, its financial risk increases.Once the firm increases its debt beyond the optimal level, rising interest charges result in an immediate decrease in EPS.

If we consider only agency costs associated with the issuance of debt, then this implies that the firm should move toward 100 percent debt financing.

If you own 100 shares in a company that announces a 2-for-1 stock split (with no other announcement), you should

If a firm adheres strictly to the residual dividend model, then if its optimal capital budget requires the use of all earnings for that year (along with new debt according to the optimal debt/total assets ratio), the firm should pay

Flavortech Inc.expects EBIT of $2,000,000 for the coming year.The firm's capital structure consists of 40 percent debt and 60 percent equity, and its marginal tax rate is 40 percent.The cost of equity is 14 percent, and the company pays a 10 percent rate on its $5,000,000 of long-term debt.One million shares of common stock are outstanding.In its next capital budgeting cycle, the firm expects to fund one large positive NPV project costing $1,200,000, and it will fund this project in accordance with its target capital structure.If the firm follows a residual dividend policy and has no other projects, what is its expected dividend payout ratio?

If a firm adheres strictly to the residual dividend model, a sale of new common stock by the company would suggest that

A decrease in the debt-to-assets ratio will generally have no effect on ____ risk.