Question 1

Cornucopia's liabilities and equity are shown below:
 
Cornucopia's debt ratio is ________.

Accepted Answer

A) .48 
B) .32 
C) .21 
D) .30 
A) .48 
B) .32 
C) .21 
D) .30

Question 2

An optimal capital structure is achieved:

Accepted Answer

A) when a firm's expected profits are maximized. 
B) when a firm's expected EPS are maximized. 
C) when a firm's break-even point is achieved. 
D) when a firm's weighted average cost of capital is minimized. 
A) when a firm's expected profits are maximized. 
B) when a firm's expected EPS are maximized. 
C) when a firm's break-even point is achieved. 
D) when a firm's weighted average cost of capital is minimized.

Question 3

Which of the following factors was most often cited by CFOs as an important influence on debt use?

Accepted Answer

A) Keeping the confidence of customers and suppliers 
B) Minimizing bankruptcy costs 
C) Maintaining financial flexibility 
D) Benchmarking against similar firms 
A) Keeping the confidence of customers and suppliers 
B) Minimizing bankruptcy costs 
C) Maintaining financial flexibility 
D) Benchmarking against similar firms

Question 4

The independence hypothesis suggests that the cost of equity decreases as financial leverage increases.

Accepted Answer

A) True 
 B)False

Question 5

Merrimac Brewing company's total assets equal $18 million.The book value of Merrimac's equity is $6 million.The market value of Merrimac's equity is $10 million.It's Debt to Value ratio is .5.What is the book value of Merrimac's interest- bearing debt?

Accepted Answer

A) $5 million 
B) $10 million 
C) $15 million 
D) $20 million 
A) $5 million 
B) $10 million 
C) $15 million 
D) $20 million

Question 6

From the information below,select the optimal capital structure for Mountain High Corp.

Accepted Answer

A) Debt = 40%;Equity = 60%;EPS = $2.95;Stock price = $26.50 
B) Debt = 50%;Equity = 50%;EPS = $3.05;Stock price = $28.90 
C) Debt = 60%;Equity = 40%;EPS = $3.18;Stock price = $31.20 
D) Debt = 80%;Equity = 20%;EPS = $3.42;Stock price = $30.40 
E) Debt = 70%;Equity = 30%;EPS = $3.31;Stock price = $30.00 
A) Debt = 40%;Equity = 60%;EPS = $2.95;Stock price = $26.50 
B) Debt = 50%;Equity = 50%;EPS = $3.05;Stock price = $28.90 
C) Debt = 60%;Equity = 40%;EPS = $3.18;Stock price = $31.20 
D) Debt = 80%;Equity = 20%;EPS = $3.42;Stock price = $30.40 
E) Debt = 70%;Equity = 30%;EPS = $3.31;Stock price = $30.00

Question 7

Investors require a higher return on common stock investments if a firm uses less leverage.

Accepted Answer

A) True 
 B)False

Question 8

Farar,Inc.projects operating income of $4 million next year.The firm's income tax rate is 40%.Farar presently has 750,000 shares of common stock,no preferred stock,and no debt.The firm is considering the issuance of $6 million of 10% bonds to finance a new product that is not expected to generate an increase in income for two years.If Farar issues the bonds this year,what will projected EPS be next year?

Accepted Answer

A) $1.53 
B) $1.98 
C) $2.33 
D) $2.72 
E) $3.12 
A) $1.53 
B) $1.98 
C) $2.33 
D) $2.72 
E) $3.12

Question 9

A firm's financial structure is defined by the Debt Ratio,while it's capital structure is defined by the Debt to Value ratio.

Accepted Answer

A) True 
 B)False

Question 10

If interest expense lowers taxes,why does the WACC not decrease indefinitely with the addition of more debt?

Accepted Answer

A) The tax shield effect of debt will result in a lower cost of equity. 
B) Increasing debt too much can result in a greater likelihood of firm failure (financial distress). 
C) A firm's common stock price will not be affected by the amount of debt a firm uses. 
D) Too much common equity increases the probability of bankruptcy. 
A) The tax shield effect of debt will result in a lower cost of equity. 
B) Increasing debt too much can result in a greater likelihood of firm failure (financial distress). 
C) A firm's common stock price will not be affected by the amount of debt a firm uses. 
D) Too much common equity increases the probability of bankruptcy.

Question 11

Weaknesses of the EBIT-EPS analysis include:

Accepted Answer

A) that it disregards the implicit costs of debt financing. 
B) that it ignores the effect of the specific financing decision on the firm's cost of common equity capital. 
C) that it considers only the level of the earnings stream and ignores the variability inherent in it. 
D) all of the above. 
A) that it disregards the implicit costs of debt financing. 
B) that it ignores the effect of the specific financing decision on the firm's cost of common equity capital. 
C) that it considers only the level of the earnings stream and ignores the variability inherent in it. 
D) all of the above.

Question 12

Which two ratios would be most helpful in managing a firm's capital structure?

Accepted Answer

A) Book Debt to Equity,Current Ratio 
B) Debt to Value Ratio and Times Interest Earned 
C) Debt to Assets,Profit Margin 
D) Payables Turnover,Return on Assets 
A) Book Debt to Equity,Current Ratio 
B) Debt to Value Ratio and Times Interest Earned 
C) Debt to Assets,Profit Margin 
D) Payables Turnover,Return on Assets

Question 13

Tremont Inc.'s Total Assets =$25 million.The balance sheet shows Accounts payable and accruals totaling $7 million,common stock and retained earnings total $10 million.There is no preferred stock.What is the book value of interest bearing debt?

Accepted Answer

A) $15 million 
B) $7 million 
C) $18 million 
D) $8 million 
A) $15 million 
B) $7 million 
C) $18 million 
D) $8 million

Question 14

Lowell Corporation and Lawrence Corporation each have EBIT of $4 million.Lowell has no debt and no interest expense;Lawrence has $2 million in debt at a before-tax rate of 8%.The tax rate is 40%.How much cash does each firm return to its investors.

Accepted Answer

A) Lowell $2,400,000,Lawrence $2,144,000 
B) Lowell $2,400,000,Lawrence $2,240,000 
C) Lowell $2,400,000,Lawrence $2,464,000 
D) Lowell $2,400,000,Lawrence $2,304,000 
A) Lowell $2,400,000,Lawrence $2,144,000 
B) Lowell $2,400,000,Lawrence $2,240,000 
C) Lowell $2,400,000,Lawrence $2,464,000 
D) Lowell $2,400,000,Lawrence $2,304,000

Question 15

When benchmarking a firm's capital structure,management should compare it:

Accepted Answer

A) firms in S&P 500. 
B) firms in the same geographic region. 
C) firms recognized for the quality of their management. 
D) firms in similar lines of business. 
A) firms in S&P 500. 
B) firms in the same geographic region. 
C) firms recognized for the quality of their management. 
D) firms in similar lines of business.

Question 16

Agency costs tend to occur in business organizations when ownership and management control are confined to the same individuals.

Accepted Answer

A) True 
 B)False

Question 17

The original form of the Modigliani and Miller Capital Structure Theorem

Accepted Answer

A) ignores the effect of taxes. 
B) ignores the relationship between firm value and cost of capital. 
C) ignores transaction costs. 
D) both A and C are true. 
A) ignores the effect of taxes. 
B) ignores the relationship between firm value and cost of capital. 
C) ignores transaction costs. 
D) both A and C are true.

Question 18

What is meant by the terms "favorable" and "unfavorable" leverage?

Accepted Answer

If a firm can earn a higher rate of retu

Question 19

Which of the following is the most important factor that affects a firm's financing mix?

Accepted Answer

A) The amount of EPS 
B) The amount of operating income 
C) The number of shares that are outstanding 
D) The predictability of cash flows 
A) The amount of EPS 
B) The amount of operating income 
C) The number of shares that are outstanding 
D) The predictability of cash flows

Question 20

The Modigliani and Miller Capital Structure Theorem suggests that the cost of equity decreases as financial leverage increases.

Accepted Answer

A) True 
 B)False

Cornucopia's liabilities and equity are shown below: Cornucopia's debt ratio is ________.

An optimal capital structure is achieved:

Which of the following factors was most often cited by CFOs as an important influence on debt use?

The independence hypothesis suggests that the cost of equity decreases as financial leverage increases.

Merrimac Brewing company's total assets equal $18 million.The book value of Merrimac's equity is $6 million.The market value of Merrimac's equity is $10 million.It's Debt to Value ratio is .5.What is the book value of Merrimac's interest- bearing debt?

From the information below,select the optimal capital structure for Mountain High Corp.

Investors require a higher return on common stock investments if a firm uses less leverage.

A firm's financial structure is defined by the Debt Ratio,while it's capital structure is defined by the Debt to Value ratio.

If interest expense lowers taxes,why does the WACC not decrease indefinitely with the addition of more debt?

Weaknesses of the EBIT-EPS analysis include:

Which two ratios would be most helpful in managing a firm's capital structure?

Tremont Inc.'s Total Assets =$25 million.The balance sheet shows Accounts payable and accruals totaling $7 million,common stock and retained earnings total $10 million.There is no preferred stock.What is the book value of interest bearing debt?

Lowell Corporation and Lawrence Corporation each have EBIT of $4 million.Lowell has no debt and no interest expense;Lawrence has $2 million in debt at a before-tax rate of 8%.The tax rate is 40%.How much cash does each firm return to its investors.

When benchmarking a firm's capital structure,management should compare it:

Agency costs tend to occur in business organizations when ownership and management control are confined to the same individuals.

The original form of the Modigliani and Miller Capital Structure Theorem

What is meant by the terms "favorable" and "unfavorable" leverage?

Which of the following is the most important factor that affects a firm's financing mix?

The Modigliani and Miller Capital Structure Theorem suggests that the cost of equity decreases as financial leverage increases.

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters

Exam 15: Capital Structure Policy

Cornucopia's liabilities and equity are shown below: Cornucopia's debt ratio is ________.

An optimal capital structure is achieved:

Which of the following factors was most often cited by CFOs as an important influence on debt use?

The independence hypothesis suggests that the cost of equity decreases as financial leverage increases.

Merrimac Brewing company's total assets equal $18 million.The book value of Merrimac's equity is $6 million.The market value of Merrimac's equity is $10 million.It's Debt to Value ratio is .5.What is the book value of Merrimac's interest- bearing debt?

From the information below,select the optimal capital structure for Mountain High Corp.

Investors require a higher return on common stock investments if a firm uses less leverage.

A firm's financial structure is defined by the Debt Ratio,while it's capital structure is defined by the Debt to Value ratio.

If interest expense lowers taxes,why does the WACC not decrease indefinitely with the addition of more debt?

Weaknesses of the EBIT-EPS analysis include:

Which two ratios would be most helpful in managing a firm's capital structure?

Tremont Inc.'s Total Assets =$25 million.The balance sheet shows Accounts payable and accruals totaling $7 million,common stock and retained earnings total $10 million.There is no preferred stock.What is the book value of interest bearing debt?

Lowell Corporation and Lawrence Corporation each have EBIT of $4 million.Lowell has no debt and no interest expense;Lawrence has $2 million in debt at a before-tax rate of 8%.The tax rate is 40%.How much cash does each firm return to its investors.

When benchmarking a firm's capital structure,management should compare it:

Agency costs tend to occur in business organizations when ownership and management control are confined to the same individuals.

The original form of the Modigliani and Miller Capital Structure Theorem

What is meant by the terms "favorable" and "unfavorable" leverage?

Which of the following is the most important factor that affects a firm's financing mix?

The Modigliani and Miller Capital Structure Theorem suggests that the cost of equity decreases as financial leverage increases.

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters