Question 1

The estimate of how quickly a firm may grow by maintaining a constant mix of debt and equity is called:

Accepted Answer

A) the retention growth rate 
B) dividend growth rate 
C) sustainable growth rate 
D) the internal growth rate

Question 2

The firm's unadjusted cost of debt financing equals the yield to maturity on new debt issues.

Accepted Answer

A) True 
 B)False

Question 3

A firm's financial risk is measured by its variability in EBIT over time.

Accepted Answer

A) True 
 B)False

Question 4

All of the following statements are correct except:

Accepted Answer

A) The pecking order hypothesis is a theory that states managers prefer to use new debt to finance the firm,then retained earnings,and (as a final resort)new equity. 
B) The market timing hypothesis states that firms try to time the equity market by issuing stock when their stock prices are low and repurchasing shares when stock values are high. 
C) The static tradeoff hypothesis states that firms will balance the advantages of equity (its lower cost and tax-deductibility of interest)with its disadvantages (greater possibility of bankruptcy and the value of explicit and implicit bankruptcy costs). 
D) Agency costs increase the optimal level of debt financing for a firm above the level that would be appropriate if agency costs were zero. 
E) None of the above statements are correct.

Question 5

Smith Company has a degree of operating leverage of 5,while Johnson Company has a degree of operating leverage of 2.Supplied with this knowledge,pick the response below that is most typical of Johnson Company.

Accepted Answer

A) high fixed costs 
B) conservative 
C) large commitment to plant facilities 
D) greater sales.

Question 6

All of the following statements regarding capital structure weights in the WACC equation are correct except:

Accepted Answer

A) The weights represent a specific intended financing mix. 
B) These target weights represent a mix of debt and equity that the firm will try to achieve or maintain over the planning horizon. 
C) As much as possible,the target weights should reflect the combination of debt and equity that management believes will minimize the firm's weighted average cost of capital. 
D) The firm should make an effort over time to move toward and maintain its target capital structure mix of debt and equity. 
E) All of the above statements are correct.

Question 7

For any firm's given growth strategy,its dividend decision directly affects its capital structure decision.

Accepted Answer

A) True 
 B)False

Question 8

Ningbo Shipping,which has an average tax rate of 40 percent,would like to estimate the after-tax cost of debt for a 15-year,12 percent,$1,000 par value bond,selling at $950.Based on this information,the after-tax cost of debt is:

Accepted Answer

A) 7.7%. 
B) 12.0%. 
C) 12.8%. 
D) 15%. 
E) none of the above.

Question 9

All of the following statements regarding capital structure weights in the WACC equation are correct except:

Accepted Answer

A) The weights represent a specific intended financing mix. 
B) These target weights represent a mix of debt and equity that the firm will try to achieve or maintain over the planning horizon. 
C) As much as possible,the target weights should reflect the combination of debt and equity that management believes will maximize the firm's weighted average cost of capital. 
D) The firm should make an effort over time to move toward and maintain its target capital structure mix of debt and equity. 
E) All of the above statements are correct.

Exam 18: Capital Structure and the Cost of Capital

The estimate of how quickly a firm may grow by maintaining a constant mix of debt and equity is called:

The firm's unadjusted cost of debt financing equals the yield to maturity on new debt issues.

A firm's financial risk is measured by its variability in EBIT over time.

All of the following statements are correct except:

Smith Company has a degree of operating leverage of 5,while Johnson Company has a degree of operating leverage of 2.Supplied with this knowledge,pick the response below that is most typical of Johnson Company.

All of the following statements regarding capital structure weights in the WACC equation are correct except:

For any firm's given growth strategy,its dividend decision directly affects its capital structure decision.

Ningbo Shipping,which has an average tax rate of 40 percent,would like to estimate the after-tax cost of debt for a 15-year,12 percent,$1,000 par value bond,selling at $950.Based on this information,the after-tax cost of debt is:

All of the following statements regarding capital structure weights in the WACC equation are correct except: