Question 1

The theory that managers may prefer internal sources of funds to the lowest cost source of funds is known as:

Accepted Answer

A) the Modigliani and Miller Proposition. 
B) tradeoff theory. 
C) financial stress avoidance theory. 
D) pecking order theory. 
A) the Modigliani and Miller Proposition. 
B) tradeoff theory. 
C) financial stress avoidance theory. 
D) pecking order theory.

Question 2

Basic tools of capital structure management include:

Accepted Answer

A) EBIT-EPS analysis. 
B) comparative profitability ratios. 
C) capital budgeting techniques. 
D) none of the above. 
A) EBIT-EPS analysis. 
B) comparative profitability ratios. 
C) capital budgeting techniques. 
D) none of the above.

Question 3

The inclusion of financial distress costs in firm valuation:

Accepted Answer

A) acknowledges that a firm is insulated from the impact of high debt financing. 
B) provides a rationale for a saucer-shaped cost of capital curve. 
C) eliminates conflicts between bondholders and stockholders. 
D) causes the cost of capital to rise in a linear fashion as more debt is added to the capital structure. 
A) acknowledges that a firm is insulated from the impact of high debt financing. 
B) provides a rationale for a saucer-shaped cost of capital curve. 
C) eliminates conflicts between bondholders and stockholders. 
D) causes the cost of capital to rise in a linear fashion as more debt is added to the capital structure.

Question 4

A firm is analyzing two different capital structures for financing a new asset that will cost $100,000.The effects of the two structures on the firm's balance sheet are described below.
Plan A: finance with 50% debt  
Based on the information provided,we can conclude that:

Accepted Answer

A) if the firm chooses Plan A,then any changes in the firm's EBIT will lead to larger fluctuations in the firm's EPS than if the firm chooses Plan B. 
B) if the firm chooses Plan B,then any changes in the firm's EBIT will lead to larger fluctuations in the firm's EPS than if the firm chooses Plan A. 
C) if the firm chooses Plan A,then any changes in the firm's EBIT will lead to the same fluctuations in the firm's EPS as will occur if the firm chooses Plan B. 
D) if the firm chooses Plan B,then any changes in the firm's EBIT will lead to smaller fluctuations in the firm's EPS than if the firm chooses Plan A. 
A) if the firm chooses Plan A,then any changes in the firm's EBIT will lead to larger fluctuations in the firm's EPS than if the firm chooses Plan B. 
B) if the firm chooses Plan B,then any changes in the firm's EBIT will lead to larger fluctuations in the firm's EPS than if the firm chooses Plan A. 
C) if the firm chooses Plan A,then any changes in the firm's EBIT will lead to the same fluctuations in the firm's EPS as will occur if the firm chooses Plan B. 
D) if the firm chooses Plan B,then any changes in the firm's EBIT will lead to smaller fluctuations in the firm's EPS than if the firm chooses Plan A.

Question 5

Other things the same,the use of debt financing reduces the firm's total tax bill,resulting in a higher total market value.

Accepted Answer

A) True 
 B)False

Question 6

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 to Value ratio is ________.

Accepted Answer

A) .38 
B) .23 
C) .125 
D) .24 
A) .38 
B) .23 
C) .125 
D) .24

Question 7

Financial structure includes long-term and short-term sources of funds.

Accepted Answer

A) True 
 B)False

Question 8

Newbury Inc.has retained $2 million in earnings this year.It can borrow up $1.5 million at a rate of 8% and sell the same amount of new stock at a cost of 17%.Newbury cost of common equity without selling any new stock is 16%.If Newbury's capital budget is $2.5 million,pecking order theory says management will use:

Accepted Answer

A) $1.5 million in debt and $1 million in retained earnings. 
B) $2 million in retained earnings and $o.5 million in debt. 
C) $833,333 each from retained earnings,new debt and new stock. 
D) $1.5 million in debt and $1 million in new stock. 
A) $1.5 million in debt and $1 million in retained earnings. 
B) $2 million in retained earnings and $o.5 million in debt. 
C) $833,333 each from retained earnings,new debt and new stock. 
D) $1.5 million in debt and $1 million in new stock.

Question 9

Chelsea Corporation's cost of equity is 16% and it is 100% equity financed.If it can borrow enough money at 10% to buy back half of its stock,what would would happen to the cost of equity be under the original assumptions of the Modigliani and Miller Capital Structure Theorem.

Accepted Answer

A) It would remain at 16%. 
B) t would rise to 22%. 
C) It would fall to 11%. 
D) It would fall to 13%. 
A) It would remain at 16%. 
B) t would rise to 22%. 
C) It would fall to 11%. 
D) It would fall to 13%.

Question 10

U.S.companies differ very little in their capital structures.

Accepted Answer

A) True 
 B)False

Question 11

The primary objective of capital structure management is to find the combination of funding sources that will minimize the

Accepted Answer

A) interest rate. 
B) WACC. 
C) probability of financial distress. 
D) cost of equity. 
A) interest rate. 
B) WACC. 
C) probability of financial distress. 
D) cost of equity.

Question 12

Which of the following is a good reason for a company to have higher than average debt ratios.

Accepted Answer

A) The company's cash flows are difficult to predict. 
B) The company generates little taxable income. 
C) Customer support is an important aspect of the company's business. 
D) The company faces high marginal tax rates. 
A) The company's cash flows are difficult to predict. 
B) The company generates little taxable income. 
C) Customer support is an important aspect of the company's business. 
D) The company faces high marginal tax rates.

Question 13

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

Accepted Answer

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

Question 14

Suppose we calculate a times interest earned ratio of 29 for Colgate-Palmolive.We can conclude:

Accepted Answer

A) Colgate-Palmolive may experience some difficulty meeting it's interest payments. 
B) Colgate-Palmolive is very unlikely to have difficulty meeting it's interest payments. 
C) Colgate-Palmolive has $29 of operating cash flow for every dollar of interest expense. 
D) Colgate-Palmolive's EBITDA is 29 times larger than its interest expense. 
A) Colgate-Palmolive may experience some difficulty meeting it's interest payments. 
B) Colgate-Palmolive is very unlikely to have difficulty meeting it's interest payments. 
C) Colgate-Palmolive has $29 of operating cash flow for every dollar of interest expense. 
D) Colgate-Palmolive's EBITDA is 29 times larger than its interest expense.

Question 15

Which of the following is NOT a component of a firm's capital structure?

Accepted Answer

A) Preferred stock 
B) Bonds 
C) Common stock 
D) Accounts payable 
E) Retained earnings 
A) Preferred stock 
B) Bonds 
C) Common stock 
D) Accounts payable 
E) Retained earnings

Question 16

According to the pecking order theory of capital structure,when external funding is needed,common stock will be used to raise the funds.

Accepted Answer

A) True 
 B)False

Question 17

The most acceptable view of capital structure,according to the text,is that the weighted average cost of capital:

Accepted Answer

A) first falls with moderate levels of leverage and then increases as a firm's leverage becomes high. 
B) does not change with leverage. 
C) increases proportionately with increases in leverage. 
D) increases with moderate amounts of leverage and then falls. 
A) first falls with moderate levels of leverage and then increases as a firm's leverage becomes high. 
B) does not change with leverage. 
C) increases proportionately with increases in leverage. 
D) increases with moderate amounts of leverage and then falls.

Question 18

List and briefly explain at least two important reasons why capital structures tend to differ between industries and even companies within the same industry.

Accepted Answer

There are several reasons why firms use

Question 19

Lever Brothers has a debt ratio (debt to assets)of 20%.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 $1,680,000,with 457,143 shares of common stock outstanding.If the firm were to instead have a debt ratio of 40%,additional interest expense would cause profits available to stockholders to decline to $1,560,000,but only 342,857 common shares would be outstanding.What is the difference in EPS at a debt ratio of 40% versus 20%?

Accepted Answer

A) $2.12 
B) $1.95 
C) $1.16 
D) $0.88 
A) $2.12 
B) $1.95 
C) $1.16 
D) $0.88

Question 20

High coverage ratios,compared with a standard,imply unused debt capacity.

Accepted Answer

A) True 
 B)False

The theory that managers may prefer internal sources of funds to the lowest cost source of funds is known as:

Basic tools of capital structure management include:

The inclusion of financial distress costs in firm valuation:

A firm is analyzing two different capital structures for financing a new asset that will cost $100,000.The effects of the two structures on the firm's balance sheet are described below. Plan A: finance with 50% debt Based on the information provided,we can conclude that:

Other things the same,the use of debt financing reduces the firm's total tax bill,resulting in a higher total market value.

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 to Value ratio is ________.

Financial structure includes long-term and short-term sources of funds.

Chelsea Corporation's cost of equity is 16% and it is 100% equity financed.If it can borrow enough money at 10% to buy back half of its stock,what would would happen to the cost of equity be under the original assumptions of the Modigliani and Miller Capital Structure Theorem.

U.S.companies differ very little in their capital structures.

The primary objective of capital structure management is to find the combination of funding sources that will minimize the

Which of the following is a good reason for a company to have higher than average debt ratios.

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

Suppose we calculate a times interest earned ratio of 29 for Colgate-Palmolive.We can conclude:

Which of the following is NOT a component of a firm's capital structure?

According to the pecking order theory of capital structure,when external funding is needed,common stock will be used to raise the funds.

The most acceptable view of capital structure,according to the text,is that the weighted average cost of capital:

List and briefly explain at least two important reasons why capital structures tend to differ between industries and even companies within the same industry.

High coverage ratios,compared with a standard,imply unused debt capacity.

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

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Exam 15: Capital Structure Policy

The theory that managers may prefer internal sources of funds to the lowest cost source of funds is known as:

Basic tools of capital structure management include:

The inclusion of financial distress costs in firm valuation:

A firm is analyzing two different capital structures for financing a new asset that will cost $100,000.The effects of the two structures on the firm's balance sheet are described below. Plan A: finance with 50% debt Based on the information provided,we can conclude that:

Other things the same,the use of debt financing reduces the firm's total tax bill,resulting in a higher total market value.

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 to Value ratio is ________.

Financial structure includes long-term and short-term sources of funds.

Chelsea Corporation's cost of equity is 16% and it is 100% equity financed.If it can borrow enough money at 10% to buy back half of its stock,what would would happen to the cost of equity be under the original assumptions of the Modigliani and Miller Capital Structure Theorem.

U.S.companies differ very little in their capital structures.

The primary objective of capital structure management is to find the combination of funding sources that will minimize the

Which of the following is a good reason for a company to have higher than average debt ratios.

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

Suppose we calculate a times interest earned ratio of 29 for Colgate-Palmolive.We can conclude:

Which of the following is NOT a component of a firm's capital structure?

According to the pecking order theory of capital structure,when external funding is needed,common stock will be used to raise the funds.

The most acceptable view of capital structure,according to the text,is that the weighted average cost of capital:

List and briefly explain at least two important reasons why capital structures tend to differ between industries and even companies within the same industry.

High coverage ratios,compared with a standard,imply unused debt capacity.

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