Exam 15: Capital Structure Policy

With taxes,but in the absence of financial distress costs,the optimal capital structure would be:

Which of the following is a reasonable conclusion from the Tradeoff theory of capital structure?

Which of the following factors favors the use of more debt in a company's financial structure?

The inclusion of bankruptcy risk in firm valuation:

Which of the following will happen if the original Modigliani and Miller Theorem is relaxed to include taxes,but not bankruptcy costs?

The pecking order theory of capital structure indicates that firms prefer to finance investment opportunities with external financial capital first,then with internally generated funds.

An optimal capital structure is achieved:

The MAX Corporation is planning a $4 million expansion this year.The expansion can be financed by issuing either common stock or bonds.The new common stock can be sold for $60 per share.The bonds can be issued with a 12% coupon rate.The firm's existing shares of preferred stock pay dividends of $2.00 per share.The company's combined state and federal corporate income tax rate is 46%.The company's balance sheet prior to expansion is as follows:

Which of the following is part of a firm's financial structure but NOT a component of its capital structure?

Under what conditions are shareholders likely to incur agency costs when managers make capital budgeting decisions?

Briefly explain what the empirical evidence suggests about financial managers' actions as they relate to the capital structure theory.

Fibonacci Property Management's balance sheet shows total liabilities of $5 million and total assets of $13 million.Interest bearing liabilities total $3 million (book value).The market value of Fibonnacci's equity is $21 million.Fibonacci's debt ratio is ________.

Lever Brothers has a debt ratio (debt to assets)of 40%.Management is wondering if its current capital structure is too conservative.Lever Brothers's present EBIT is $3 million,and profits available to common shareholders are $1,560,000,with 342,857 shares of common stock outstanding.If the firm were to instead have a debt ratio of 60%,additional interest expense would cause profits available to stockholders to decline to $1,440,000,but only 228,571 common shares would be outstanding.What is the difference in EPS at a debt ratio of 60% versus 40%?

The capital structure that minimizes the weighted average cost of capital will also:

Adams Inc.expects EBIT of $50 million if there is a recession,$100 million if the economy is normal,and $150 million if the economy expands.Bellingham Inc.also expects EBIT of $50 million if there is a recession,$100 million if the economy is normal,and $150 million if the economy expands.Adams is financed entirely with equity while Bellingham is financed 50% with debt at 10%.Adams has $200 million in equity;Bellingham is financed with $100 million of debt and $100 million of equity.The tax rate is 30%.Both firms pay out all available earnings as dividends.If there is a recession,compare dividends and total distributions to investors for each company.

In which countries would you expect companies to have the lowest leverage ratios?

Which of the following should be excluded from a firm's capital structure?

An increase in the ________ is likely to encourage a corporation to increase its debt ratio.

Lever Brothers has a debt ratio (debt to assets)of 60%.Management is wondering if its current capital structure is too aggressive.Lever Brothers's present EBIT is $3 million,and profits available to common shareholders are $1,440,000,with 228,571 shares of common stock outstanding.If the firm were to instead have a debt ratio of 20%,reduced interest expense would cause profits available to stockholders to increase to $1,680,000,but 457,143 common shares would be outstanding.What is the difference in EPS at a debt ratio of 20% versus 60%?

Cheshire Corporation is now financed 100% with equity.The cost of equity is 15%.Cheshire is considering a proposal to borrow enough money at 7% to buy back half of its common stock.It would then be financed 50% with debt and 50% with equity.Assume that this does not affect the cost of equity.Cheshire's tax rate is 40%.What is Cheshire's cost of capital without and with the stock repurchase?