Question 1

Comparative leverage ratio analysis does not involve the use of industry norms.

Accepted Answer

A) True 
 B)False

Question 2

Useful ratios for benchmarking a firm's capital structure include:

Accepted Answer

A) the Debt ratio. 
B) Times Interest Earned ratio. 
C) EBITDA coverage ratio. 
D) all of the above. 
A) the Debt ratio. 
B) Times Interest Earned ratio. 
C) EBITDA coverage ratio. 
D) all of the above.

Question 3

Zybeck Corp.projects operating income of $4 million next year.The firm's income tax rate is 40%.Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share,no preferred stock,and no debt.The firm is considering two alternatives to finance a new product: (a)the issuance of $6 million of 10% bonds,or (b)the issuance of 60,000 new shares of common stock at $10 per share.If Zybeck issues common stock this year,what will the firm's return on equity be next year?

Accepted Answer

A) 16.7% 
B) 18.2% 
C) 22.1% 
D) 26.4% 
E) 29.6% 
A) 16.7% 
B) 18.2% 
C) 22.1% 
D) 26.4% 
E) 29.6%

Question 4

Capital structure theory suggests that companies may put the interests of ________ ahead of the interests of ________.

Accepted Answer

A) Potential stockholders,existing stockholders 
B) Stockholders,bondholders 
C) There are no potential conflicts t arising from the way a firm manages its capital structure. 
D) Existing shareholders,IRS 
A) Potential stockholders,existing stockholders 
B) Stockholders,bondholders 
C) There are no potential conflicts t arising from the way a firm manages its capital structure. 
D) Existing shareholders,IRS

Question 5

Optimal capital structure is:

Accepted Answer

A) the funding mix that will maximize the company's common stock price. 
B) the mix of all items that appear on the right-hand side of the company's balance sheet. 
C) the mix of funds that will minimize the firm's beta. 
D) the mix of securities that will maximize EPS. 
A) the funding mix that will maximize the company's common stock price. 
B) the mix of all items that appear on the right-hand side of the company's balance sheet. 
C) the mix of funds that will minimize the firm's beta. 
D) the mix of securities that will maximize EPS.

Question 6

Allston-Brighton Corp.has total assets of $10 million,total liabilities of $4 million,of which $1 million are non-interest bearing.Interest expense was $180,000.Earnings before interest and taxes were $2.5 million.Depreciation was $1.5 million.Compute the following ratios: Debt ratio,Interest-bearing debt ratio,Times interest earned ratio,and EBITDA coverage ratio.

Accepted Answer

Debt ratio = $4,000,000/$10,000,000 = .4

Question 7

The tax shield on interest is calculated by multiplying the interest rate paid on debt by the principal amount of the debt and the firm's marginal tax rate.

Accepted Answer

A) True 
 B)False

Question 8

Zybeck Corp.projects operating income of $4 million next year.The firm's income tax rate is 40%.Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share,no preferred stock,and no debt.The firm is considering two alternatives to finance a new product: (a)the issuance of $6 million of 10% bonds,or (b)the issuance of 60,000 new shares of common stock.There are no issuance costs for either the bonds or the stock.If Zybeck issues common stock this year,what will projected EPS be next year?

Accepted Answer

A) $2.10 
B) $2.96 
C) $2.33 
D) $1.67 
A) $2.10 
B) $2.96 
C) $2.33 
D) $1.67

Question 9

A firm's capital structure consists of which of the following?

Accepted Answer

A) The amount of debt that a firm utilizes 
B) The amount of debt and preferred stock that a firm utilizes 
C) The amount of debt,preferred stock,and common stock that a firm utilizes 
D) None of the above 
A) The amount of debt that a firm utilizes 
B) The amount of debt and preferred stock that a firm utilizes 
C) The amount of debt,preferred stock,and common stock that a firm utilizes 
D) None of the above

Question 10

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 Merrimac's Debt Ratio?

Accepted Answer

A) .75 
B) .67 
C) .33 
D) .25 
A) .75 
B) .67 
C) .33 
D) .25

Question 11

The Modigliani and Miller Capital Structure Theorem,in its original form:

Accepted Answer

A) uses unrealistic assumptions. 
B) provided important insights into capital structure policy. 
C) concludes that how a firm is financed is not important. 
D) all of the above. 
A) uses unrealistic assumptions. 
B) provided important insights into capital structure policy. 
C) concludes that how a firm is financed is not important. 
D) all of the above.

Question 12

As a general rule,the optimal capital structure:

Accepted Answer

A) maximizes expected EPS and also maximizes the price per share of common stock. 
B) minimizes the interest rate on debt and also maximizes the expected EPS. 
C) minimizes the required rate on equity and also maximizes the stock price. 
D) maximizes the price per share of common stock and also minimizes the weighted average cost of capital. 
A) maximizes expected EPS and also maximizes the price per share of common stock. 
B) minimizes the interest rate on debt and also maximizes the expected EPS. 
C) minimizes the required rate on equity and also maximizes the stock price. 
D) maximizes the price per share of common stock and also minimizes the weighted average cost of capital.

Question 13

Which industry would you expect to have the highest Debt to Asset ratios?

Accepted Answer

A) Business oriented software 
B) Electric utilities 
C) Communications equipment 
D) Retail clothing 
A) Business oriented software 
B) Electric utilities 
C) Communications equipment 
D) Retail clothing

Question 14

Roberts,Inc.is trying to decide how best to finance a proposed $10 million capital investment.Under Plan I,the project will be financed entirely with long-term 9% bonds.The firm currently has no debt or preferred stock.Under Plan II,common stock will be sold to net the firm $20 a share;presently,1 million shares are outstanding.The corporate tax rate for Roberts is 40%.
a.Calculate the indifference level of EBIT associated with the two financing plans.
b.Which financing plan would you expect to cause the greatest change in EPS relative to a change in EBIT? Why?
c.If EBIT is expected to be $3.1 million,which plan will result in a higher EPS?

Accepted Answer

The answer of Roberts,Inc.is trying to decide how best to...

Question 15

The trade-off theory of capital structure recognizes the tax-shield benefit of debt financing,but also recognizes that the benefit is offset by costs associated with debt financing.

Accepted Answer

A) True 
 B)False

Question 16

The Modigliani and Miller Capital Structure Theorem,in its original form,assumes:

Accepted Answer

A) there are no transactions costs. 
B) there are no taxes. 
C) investors can borrow money at the same rate as the firm. 
D) all of the above. 
A) there are no transactions costs. 
B) there are no taxes. 
C) investors can borrow money at the same rate as the firm. 
D) all of the above.

Question 17

Young Enterprises is financed entirely with 3 million shares of common stock selling for $20 a share.Capital of $4 million is needed for this year's capital budget.Additional funds can be raised with new stock (ignore dilution)or with 13% 10-year bonds.Young's tax rate is 40%.
a.Calculate the financing plan's EBIT indifference point.
b.Does the "indifference point" calculated in question (a)above truly represent a point where stockholders are indifferent between stock and debt financing? Explain your answer.

Accepted Answer

The answer of Young Enterprises is financed entirely with 3...

Question 18

Sunshine Candy Company's capital structure for the past year of operation is shown below.   
The federal tax rate is 50%.Sunshine Candy Company,home-based in Orlando,wants to raise an additional $1 million to open new facilities in Tampa and Miami.The firm can accomplish this via two alternatives: (1)it can sell a new issue of 20-year debentures with 16% interest;or (2)20,000 new shares of common stock can be sold to the public to net the candy company $50 per share.A recent study,performed by an outside consulting organization,projected Sunshine Candy Company's long-term EBIT level at approximately $6.8 million.Find the indifference level of EBIT (with regard to EPS)between the suggested financing plans.

Accepted Answer

[(EBIT - 465,000)(0.5)]/1,020,000 =
[(EB

Question 19

The firm's optimal capital structure is the mix of financing sources that:

Accepted Answer

A) minimizes the risk of financial distress. 
B) maximizes after-tax earnings. 
C) maximizes the total value of the firm's debt and equity. 
D) all of the above. 
A) minimizes the risk of financial distress. 
B) maximizes after-tax earnings. 
C) maximizes the total value of the firm's debt and equity. 
D) all of the above.

Question 20

Companies faced with higher tax burdens are likely to use more debt.

Accepted Answer

A) True 
 B)False

Comparative leverage ratio analysis does not involve the use of industry norms.

Useful ratios for benchmarking a firm's capital structure include:

Capital structure theory suggests that companies may put the interests of ahead of the interests of .

Optimal capital structure is:

The tax shield on interest is calculated by multiplying the interest rate paid on debt by the principal amount of the debt and the firm's marginal tax rate.

A firm's capital structure consists of which of the following?

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 Merrimac's Debt Ratio?

The Modigliani and Miller Capital Structure Theorem,in its original form:

As a general rule,the optimal capital structure:

Which industry would you expect to have the highest Debt to Asset ratios?

The trade-off theory of capital structure recognizes the tax-shield benefit of debt financing,but also recognizes that the benefit is offset by costs associated with debt financing.

The Modigliani and Miller Capital Structure Theorem,in its original form,assumes:

The firm's optimal capital structure is the mix of financing sources that:

Companies faced with higher tax burdens are likely to use more debt.

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

Comparative leverage ratio analysis does not involve the use of industry norms.

Useful ratios for benchmarking a firm's capital structure include:

Capital structure theory suggests that companies may put the interests of ________ ahead of the interests of ________.

Optimal capital structure is:

The tax shield on interest is calculated by multiplying the interest rate paid on debt by the principal amount of the debt and the firm's marginal tax rate.

A firm's capital structure consists of which of the following?

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 Merrimac's Debt Ratio?

The Modigliani and Miller Capital Structure Theorem,in its original form:

As a general rule,the optimal capital structure:

Which industry would you expect to have the highest Debt to Asset ratios?

The trade-off theory of capital structure recognizes the tax-shield benefit of debt financing,but also recognizes that the benefit is offset by costs associated with debt financing.

The Modigliani and Miller Capital Structure Theorem,in its original form,assumes:

The firm's optimal capital structure is the mix of financing sources that:

Companies faced with higher tax burdens are likely to use more debt.

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

Capital structure theory suggests that companies may put the interests of ahead of the interests of .