Question 1

Agency costs occur when managers choose the easiest form of financing over the value maximizing capital structure.

Accepted Answer

A) True 
 B)False

Question 2

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 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.
-EPS at the indifference level of EBIT is

Accepted Answer

A) $3.17. 
B) $4.80. 
C) $5.27. 
D) $5.90. 
A) $3.17. 
B) $4.80. 
C) $5.27. 
D) $5.90.

Question 4

The pecking order theory of capital structure indicates that firms prefer to finance investment opportunities with least expensive forms of financing first and the most expensive last.

Accepted Answer

A) True 
 B)False

Question 5

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 6

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 7

Basic tools of capital structure management include

Accepted Answer

A) EBIT-EPS analysis. 
B) comparative profitability ratios. 
C) capital budgeting techniques. 
D) economic value added analysis. 
A) EBIT-EPS analysis. 
B) comparative profitability ratios. 
C) capital budgeting techniques. 
D) economic value added analysis.

Question 8

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 9

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 10

The pecking order theory of capital structure is derived from

Accepted Answer

A) expectations theory. 
B) the Modigliani-Miller theory. 
C) liquidity preference theory. 
D) agency theory. 
A) expectations theory. 
B) the Modigliani-Miller theory. 
C) liquidity preference theory. 
D) agency theory.

Question 11

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

Accepted Answer

A) maximize EPS for any given level of EBIT. 
B) minimize the value of the firm. 
C) minimize bankruptcy costs. 
D) maximize the price per share of common stock. 
A) maximize EPS for any given level of EBIT. 
B) minimize the value of the firm. 
C) minimize bankruptcy costs. 
D) maximize the price per share of common stock.

Question 12

Assume that the tax rate is 40% and bankruptcy costs are negligible until a firm's debt to equity ratio is greater than one.If Madison Co.increases debt from 10% of its capital structure to 40%,cash flows to investors will

Accepted Answer

A) decrease. 
B) remain the same. 
C) increase. 
D) A firm's cash flows are independent of its capital structure. 
A) decrease. 
B) remain the same. 
C) increase. 
D) A firm's cash flows are independent of its capital structure.

Question 13

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

Agency costs occur when managers choose the easiest form of financing over the value maximizing capital structure.

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

The pecking order theory of capital structure indicates that firms prefer to finance investment opportunities with least expensive forms of financing first and the most expensive last.

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.

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 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.

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 pecking order theory of capital structure is derived from

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

Assume that the tax rate is 40% and bankruptcy costs are negligible until a firm's debt to equity ratio is greater than one.If Madison Co.increases debt from 10% of its capital structure to 40%,cash flows to investors will

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

Agency costs occur when managers choose the easiest form of financing over the value maximizing capital structure.

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

The pecking order theory of capital structure indicates that firms prefer to finance investment opportunities with least expensive forms of financing first and the most expensive last.

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.

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 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.

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 pecking order theory of capital structure is derived from

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

Assume that the tax rate is 40% and bankruptcy costs are negligible until a firm's debt to equity ratio is greater than one.If Madison Co.increases debt from 10% of its capital structure to 40%,cash flows to investors will

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