Question 1

When the impact of taxes is considered,as the firm takes on more debt

Accepted Answer

A) there will be no change in total cash flows. 
B) both taxes and total cash flow to stockholders and bondholders will decrease. 
C) cash flows will increase because taxes will decrease. 
D) the weighted average cost of capital will increase. 
A) there will be no change in total cash flows. 
B) both taxes and total cash flow to stockholders and bondholders will decrease. 
C) cash flows will increase because taxes will decrease. 
D) the weighted average cost of capital will increase.

Question 2

Newbury Inc.has retained $2 million in earnings this year.It can borrow up to $1.5 million at a rate of 8% and sell the same amount of new stock at a cost of 17%.Newbury's 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 $0.5 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 $0.5 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 3

Use the following information to answer the following question(s).
Your firm is trying to determine whether it should finance a project requiring $800,000 with new common stock or with debt.The firm is faced with the following financing alternatives:
I: Issue new common stock.Sale price of the common stock is expected to be $40 per share.
II: Issue new bonds with a coupon rate of 12%.
The firm has a marginal tax rate of 34%,the company currently has 40,000 shares of common stock outstanding,and $90,000 face value of 10% debt outstanding.
-The indifference level of EBIT is

Accepted Answer

A) $99,000. 
B) $66,600. 
C) $333,000. 
D) $297,000. 
A) $99,000. 
B) $66,600. 
C) $333,000. 
D) $297,000.

Question 4

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

Accepted Answer

A) Common equity 
B) Non-interest bearing debt 
C) Long-term debt 
D) Short-term bank notes 
A) Common equity 
B) Non-interest bearing debt 
C) Long-term debt 
D) Short-term bank notes

Question 5

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

Accepted Answer

A) Countries with very high tax rates 
B) Countries that tend to subsidize key industries and protect them from failure 
C) Countries where creditors have very strong legal protection 
D) Countries where the market value of companies is high compared to their book values 
A) Countries with very high tax rates 
B) Countries that tend to subsidize key industries and protect them from failure 
C) Countries where creditors have very strong legal protection 
D) Countries where the market value of companies is high compared to their book values

Question 6

From the table above we can conclude

Accepted Answer

A) Waltham has a conservative capital structure policies. 
B) Waltham has too much debt. 
C) Waltham uses more leverage than the typical firm in its industry. 
D) Waltham's EPS would be more sensitive than a typical firm's to changes in EBIT. 
A) Waltham has a conservative capital structure policies. 
B) Waltham has too much debt. 
C) Waltham uses more leverage than the typical firm in its industry. 
D) Waltham's EPS would be more sensitive than a typical firm's to changes in EBIT.

Question 7

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) maximizes favorable leverage. 
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) maximizes favorable leverage.

Question 8

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 9

Conservative balance sheets may be advantageous for companies that have long-term relationships with their customers.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is consistent with the Tradeoff theory of capital structure?

Accepted Answer

A) The cost of capital continuously decreases as the firm's debt ratio increases. 
B) The cost of capital remains constant as the firm's debt ratio increases. 
C) There are no costs associated with bankruptcy. 
D) There is an optimal level of debt financing. 
A) The cost of capital continuously decreases as the firm's debt ratio increases. 
B) The cost of capital remains constant as the firm's debt ratio increases. 
C) There are no costs associated with bankruptcy. 
D) There is an optimal level of debt financing.

Question 11

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 12

When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan,the debt financing plan line will have

Accepted Answer

A) a steeper slope than the equity financing plan line. 
B) a slower rate of change as EBIT increases. 
C) a downward slope. 
D) the same slope as the equity plan,but a higher intercept. 
A) a steeper slope than the equity financing plan line. 
B) a slower rate of change as EBIT increases. 
C) a downward slope. 
D) the same slope as the equity plan,but a higher intercept.

Question 13

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 14

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 15

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

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) The amount of debt that a firm uses 
B) The amount of debt and preferred stock that a firm uses 
C) The amount of debt,preferred stock,and common stock that a firm uses 
D) The mix of long and short-term debt used by the firm 
A) The amount of debt that a firm uses 
B) The amount of debt and preferred stock that a firm uses 
C) The amount of debt,preferred stock,and common stock that a firm uses 
D) The mix of long and short-term debt used by the firm

Question 17

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

Question 18

Benchmarking the company's capital structure is popular because it is impossible to know exactly what the company's optimal capital structure should be.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) 100% equity. 
B) 50% debt,50% equity. 
C) 100% debt. 
D) completely insensitive to the mix of debt and equity. 
A) 100% equity. 
B) 50% debt,50% equity. 
C) 100% debt. 
D) completely insensitive to the mix of debt and equity.

Question 20

Cornucopia's liabilities and equity are shown below:
 
What is Cornucopia's debt to value ratio?

Accepted Answer

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

When the impact of taxes is considered,as the firm takes on more debt

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

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

From the table above we can conclude

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

Useful ratios for benchmarking a firm's capital structure include

Conservative balance sheets may be advantageous for companies that have long-term relationships with their customers.

Which of the following is consistent with the Tradeoff theory of capital structure?

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

When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan,the debt financing plan line will have

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

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

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

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

Benchmarking the company's capital structure is popular because it is impossible to know exactly what the company's optimal capital structure should be.

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

Cornucopia's liabilities and equity are shown below: What is Cornucopia's debt to value ratio?

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

When the impact of taxes is considered,as the firm takes on more debt

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

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

From the table above we can conclude

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

Useful ratios for benchmarking a firm's capital structure include

Conservative balance sheets may be advantageous for companies that have long-term relationships with their customers.

Which of the following is consistent with the Tradeoff theory of capital structure?

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

When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan,the debt financing plan line will have

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

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

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

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

Benchmarking the company's capital structure is popular because it is impossible to know exactly what the company's optimal capital structure should be.

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

Cornucopia's liabilities and equity are shown below: What is Cornucopia's debt to value ratio?

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 .