羅斯公司理財題庫cha17

Chapter17CapitalStructure:LimitstotheUseofDebtMultipleChoiceQuestions1.Theexplicitcosts,suchasthelegalexpenses,associatedwithcorporatedefaultareclassifiedas_____costs.flotationbetaconversiondirectbankruptcyindirectbankruptcyunleveredThecostsofavoidingabankruptcyfilingbyafinanciallydistressedfirmareclassifiedasD.financialsolvencyE.capitalstructureTheexplicitandimplicitcostsassociatedwithcorporatedefaultarereferredtoasthe_____costsofafirm.flotationdefaultbetadirectbankruptcyindirectbankruptcyfinancialdistress4.Indirectcostsoffinancialdistress:A.effectivelylimittheamountofequityafirmissues.B.serveasanincentivetoincreasethefinancialleverageofafirm.C.includedirectcostssuchaslegalandaccountingfees.D.tendtoincreaseasthedebt-equityratiodecreases.E.includethecostsincurredbyafirmasittriestoavoidseekingbankruptcyprotection.Thelegalproceedingforliquidatingorreorganizingafirmoperatingindefaultiscalleda:A.tenderoffer.B.xyfight.Thevalueofafirmismaximizedwhenthe:A.costofequityismaximized.B.taxrateiszero.C.leveredcostofcapitalismaximized.D.weightedaveragecostofcapitalisminimized.E.debt-equityratioisminimized.Theoptimalcapitalstructurehasbeenachievedwhenthe:A.debt-equityratioisequalto1.B.weightofequityisequaltotheweightofdebt.C.costofequityismaximizedgivenapre-taxcostofdebt.D.debt-equityratioissuchthatthecostofdebtexceedsthecostofequity.E.debt-equityratioselectedresultsinthelowestpossibleweighedaveragecostofcapital.Inaworldwithtaxesandfinancialdistress,whenafirmisoperatingwiththeoptimalcapitalstructure:I.thedebt-equityratiowillalsobeoptimal.II.theweightedaveragecostofcapitalwillbeatitsminimalpoint.III.therequiredreturnonassetswillbeatitsmaximumpoint.IV.theincreasedbenefitfromadditionaldebtisequaltotheincreasedbankruptcycostsofthatdebt.A.IandIVonlyB.IIandIIIonlyC.IandIIonlyD.II,III,andIVonlyE.I,II,andIVonlyTheoptimalcapitalstructurewilltendtoincludemoredebtforfirmswith:A.thehighestdepreciationdeductions.B.thelowestmarginaltaxrate.C.substantialtaxshieldsfromothersources.D.lowerprobabilityoffinancialdistress.E.lesstaxableincome.Theoptimalcapitalstructureofafirm_____themarketedclaimsand_____thenonmarketedclaimsagainstthecashflowsofthefirm.A.minimizes;minimizesB.minimizes;maximizesC.maximizes;minimizesD.maximizes;maximizesE.equates;(leaveblank)11.Theoptimalcapitalstructure:A.willbethesameforallfirmsinthesameindustry.B.willremainconstantovertimeunlessthefirmmakesanacquisition.C.ofafirmwillvaryovertimeastaxesandmarketconditionschange.D.placesmoreemphasisontheoperationsofafirmratherthanthefinancingofafirm.E.isunaffectedbychangesinthefinancialmarkets.ThebasiclessonofMMtheoryisthatthevalueofafirmisdependentuponthe:A.capitalstructureofthefirm.B.totalcashflowsofthefirm.C.percentageofafirmtowhichthebondholdershaveaclaim.D.taxclaimplacedonthefirmbythegovernment.E.sizeofthestockholdersclaimsonthefirm.CorporationsintheU.S.tendto:A.minimizetaxes.B.underutilizedebt.C.relylessonequityfinancingthantheyshould.D.haveextremelyhighdebt-equityratios.E.relymoreheavilyonbondsthanstocksasthemajorsourceoffinancing.Ingeneral,thecapitalstructuresusedbyU.S.firms:A.tendtooverweighdebtinrelationtoequity.B.areeasilyexplainedintermsofearningsvolatility.C.areeasilyexplainedbyanalyzingthetypesofassetsownedbythevariousfirms.D.tendtobethosewhichmaximizetheuseofthefirm'savailabletaxshelters.E.varysignificantlyacrossindustries.TheMMtheorywithtaxesimpliesthatfirmsshouldissuemaximumdebt.Inpractice,thisisnottruebecause:A.debtismoreriskythanequity.B.bankruptcyisadisadvantagetodebt.C.firmswillincurlargeagencycostsofshorttermdebtbyissuinglongtermdebt.D.BothAandB.E.BothBandC.Althoughtheuseofdebtprovidestaxbenefitstothefirm,debtalsoputspressureonthefirmto:A.meetinterestandprincipalpaymentswhich,ifnotmet,canputthecompanyintofinancialdistress.B.makedividendpaymentswhichifnotmetcanputthecompanyintofinancialdistress.C.meetbothinterestanddividendpaymentswhichwhenmetincreasethefirmcashflow.D.meetincreasedtaxpaymentstherebyincreasingfirmvalue.E.Noneoftheabove.Givenrealisticestimatesoftheprobabilityandcostofbankruptcy,thefuturecostsofapossiblebankruptcyareborneby:A.allinvestorsinthefirm.B.debtholdersonlybecauseifdefaultoccursinterestandprincipalpaymentsarenotmade.C.shareholdersbecausedebtholderswillpaylessforthedebtprovidinglesscashfortheshareholders.D.managementbecauseifthefirmdefaultstheywilllosetheirjobs.E.Noneoftheabove.Conflictsofinterestbetweenstockholdersandbondholdersareknownas:A.trusteecosts.B.financialdistresscosts.C.dealercosts.D.agencycosts.E.underwritingcosts.Oneoftheindirectcostsofbankruptcyistheincentiveformanagerstotakelargerisks.Whenfollowingthisstrategy:A.thefirmwillrankallprojectsandtaketheprojectwhichresultsinthehighestexpectedvalueofthefirm.B.bondholdersexpropriatevaluefromstockholdersbyselectinghighriskprojects.C.stockholdersexpropriatevaluefrombondholdersbyselectinghighriskprojects.D.thefirmwillalwaystakethelowriskproject.E.BothAandB.20.Oneoftheindirectcoststobankruptcyistheincentivetowardunderinvestment.Followingthisstrategymayresultin:A.thefirmalwayschoosingprojectswiththepositiveNPVs.B.thefirmturningdownpositiveNPVprojectsthatitwouldclearlyacceptinanallequityfirm.C.stockholderscontributingthefullamountoftheinvestment,butbothstockholdersandbondholderssharinginthebenefitsoftheproject.D.BothAandC.E.BothBandC.21.Whichofthefollowingistrue?A.Afirmwithlowanticipatedprofitwilllikelytakeonahighlevelofdebt.B.Asuccessfulfirmwillprobablytakeonzerodebt.C.Rationalfirmsraisedebtlevelswhenprofitsareexpectedtodecline.D.Rationalinvestorsarelikelytoinferahigherfirmvaluefromazerodebtlevel.E.Investorswillgenerallyviewanincreaseindebtasapositivesignforthefirm'svalue.Studieshavefoundthatfirmswithhighproportionsofintangibleassetsarelikelytouse____________debtcomparedwithfirmswithlowproportionsofintangibleassets.morethesameamountoflesseithermoreorthesameamountofanyamountofdebtWhatthreefactorsareimportanttoconsiderindeterminingatargetdebttoequityratio?A.Taxes,assettypes,andpeckingorderandfinancialslackB.Assettypes,uncertaintyofoperatingincome,andpeckingorderandfinancialslackC.Taxes,financialslackandpeckingorder,anduncertaintyofoperatingincomeD.Taxes,assettypes,anduncertaintyofoperatingincomeE.Noneoftheabove.24.Anexchangemayoffer:A.allowcustomersa30daymoney-backguaranteeonthefirm'sproduct.B.allowcustomersa90daywarrantyonthefirm'sproductfromdefects.C.allowbondholderstoexchangesomedebtforstock.D.allowstockholderstoexchangesomeoftheirstockfordebt.E.BothCandD.Whichofthefollowingisnotempiricallytruewhenformulatingcapitalstructurepolicy?A.Somefirmsusenodebt.B.Mostcorporationshavelowdebt-assetratios.C.Therearenodifferencesinthecapital-structureofdifferentindustries.D.Debtlevelsacrossindustriesvarywidely.E.Debtratiosinmostcountriesareconsiderablylessthan100%.Whenshareholderspursueselfishstrategiessuchastakinglargerisksorpayingexcessivedividends,thesewillresultin:A.noactionbydebtholderssincetheseareequityholderconcerns.B.positiveagencycosts,asbondholdersimposevariousrestrictionsandcovenantswhichwilldiminishfirmvalue.C.investmentsofthesameriskclassthatthefirmisin.D.undertakingscaleenhancingprojects.E.loweragencycosts,asshareholdershavemorecontroloverthefirm'sassets.27.Indirectcostsofbankruptcyarebornprincipallyby:bondholders.stockholders.managers.thefederalgovernment.thefirm'ssuppliers.Thevalueofafirminfinancialdistressisdiminishedifthefirm:A.isdeclaredbankruptandproceedstobeliquidated.B.isdeclaredinsolventandundergoesfinancialreorganization.C.isapartnership.D.BothAandC.E.BothAandB.Covenantsrestrictingtheuseofleasingandadditionalborrowingsprimarilyprotect:A.theequityholdersfromaddedriskofdefault.B.thedebtholdersfromtheaddedriskofdilutionoftheirclaims.C.thedebtholdersfromthetransferofassets.D.themanagementfromhavingtopayagencycosts.E.Noneoftheabove.Ifafirmissuesdebtbutwritesprotectiveandrestrictivecovenantsintotheloancontract,thenthefirm'sdebtmaybeissuedata_____interestratecomparedwithotherwisesimilardebt.A.significantlyhigherB.slightlyhigherequallowerEitherAorB31.Whengraphingfirmvalueagainstdebtlevels,thedebtlevelthatmaximizesthevalueofthefirmisthelevelwhere:A.theincreaseinthepresentvalueofdistresscostsfromanadditionaldollarofdebtisgreaterthantheincreaseinthepresentvalueofthedebttaxshield.B.theincreaseinthepresentvalueofdistresscostsfromanadditionaldollarofdebtisequaltotheincreaseinthepresentvalueofthedebttaxshield.C.theincreaseinthepresentvalueofdistresscostsfromanadditionaldollarofdebtislessthantheincreaseofthepresentvalueofthedebttaxshield.D.distresscostsaswellasdebttaxshieldsarezero.E.distresscostsaswellasdebttaxshieldsaremaximized.Whenfirmsissuemoredebt,thetaxshieldondebt_____,theagencycostsondebt(i.e.,costsoffinancialdistress)_____,andtheagencycostsonequity_____.A.increases;increase;increaseB.decreases;decrease;decreaseC.increases;increase;decreaseD.decreases;decrease;increaseE.increases;decrease;decrease33.Thefreecashflowhypothesisstates:A.thatfirmswithgreaterfreecashflowwillpaymoreindividendsreducingtheriskoffinancialdistress.B.thatfirmswithgreaterfreecashflowshouldissuenewequitytoforcemanagerstominimizewastingresourcesandtoworkharder.C.thatissuingdebtrequiresinterestandprincipalpaymentsreducingthepotentialofmanagementtowasteresources.D.BothAandC.E.BothBandC.34.Issuingdebtinsteadofnewequityinacloselyheldfirmmorelikely:A.causestheowner-managertoworklesshardandshirktheirdutiesastheyhavelesscapitalatrisk.B.causestheowner-managertoconsumemoreperquisitesbecausethecostispassedtothedebtholders.C.causesbothmoreshirkingandperquisiteconsumptionsincethegovernmentprovidesataxshieldondebt.D.causesagencycoststofallasowner-managersdonotneedtoworryaboutothershareholders.E.causestheowner-managertoreduceshirkingandperquisiteconsumptionastheexcesscashflowmustbeusedtomeetdebtpayments.Thepeckingorderstateshowfinancingshouldberaised.Inordertoavoidasymmetricinformationproblemsandmisinterpretationofwhethermanagementissendingasignalonsecurityovervaluation,thefirm'sfirstruleisto:A.financewithinternallygeneratedfunds.B.alwaysissuedebtthenthemarketwon'tknowwhenmanagementthinksthesecurityisovervalued.C.issuenewequityfirst.D.issuedebtfirst.E.Noneoftheabove.Growthopportunities_______the_____ofdebtfinancing.A.increase;advantageB.decrease;advantageC.decrease;disadvantageD.BothAandCE.NoneoftheaboveWhichofthefollowingindustrieswouldtendtohavethehighestleverage?A.DrugsComputerPaperElectronicsBiologicalproducts38.Theintroductionofpersonaltaxesmayrevealadisadvantagetotheuseofdebtifthe:A.personaltaxrateonthedistributionofincometostockholdersislessthanthepersonaltaxrateoninterestincome.B.personaltaxrateonthedistributionofincometostockholdersisgreaterthanthepersonaltaxrateoninterestincome.C.personaltaxrateonthedistributionofincometostockholdersisequaltothepersonaltaxrateoninterestincome.D.personaltaxrateoninterestincomeiszero.E.Noneoftheabove.InMiller'smodel,whenthequantity[(1-Tc)(1-Ts)=(1-Tb)],then:A.thefirmshouldholdnodebt.B.thevalueoftheleveredfirmisgreaterthanthevalueoftheunleveredfirm.C.thetaxshieldondebtisexactlyoffsetbyhigherpersonaltaxespaidoninterestincome.D.thetaxshieldondebtisexactlyoffsetbyhigherlevelsofdividends.E.thetaxshieldondebtisexactlyoffsetbyhighercapitalgains.InaMillerequilibrium,whattypeofinvestmentsdohightaxbracketinvestorstendtohold?A.BondsStocksDebenturesBothstocksandbonds.Neitherstocksnorbonds.41.TheTrunkLineCompanywillearn$60inoneyearifitdoeswell.Thedebtholdersarepromisedpaymentsof$35inoneyearifthefirmdoeswell.Ifthefirmdoespoorly,expectedearningsinoneyearwillbe$30andtherepaymentwillbe$20becauseofthedeadweightcostofbankruptcy.Theprobabilityofthefirmperformingpoorlyorwellis50%.Ifbondholdersarefullyawareofthesecostswhatwilltheypayforthedebt?Theinterestrateonthebondsis10%.$25.00$27.50$29.55$32.50$35.00TheTrunkLineCompanydebtholdersarepromisedpaymentsof$35ifthefirmdoeswell,butwillreceiveonly$20ifthefirmdoespoorly.Bondholdersarewillingtopay$25.Thepromisedreturntothebondholdersisapproximately:A.2.9%16.9%27.3%40.0%100%Aninvestmentisavailablethatpaysatax-free6%.Thecorporatetaxrateis30%.Ignoringrisk,whatisthepre-taxreturnontaxablebonds?A.4.20%6.00%7.67%8.57%Noneoftheabove.Yourfirmhasadebt-equityratioof.60.Yourcostofequityis11%andyourafter-taxcostofdebtis7%.Whatwillyourcostofequitybeifthetargetcapitalstructurebecomesa50/50mixofdebtandequity?9.50%10.50%11.00%11.25%12.00%TheAggieCompanyhasEBITof$50,000andmarketvaluedebtof$100,000outstandingwitha9%couponrate.Thecostofequityforanallequityfirmwouldbe14%.Aggiehasa35%corporatetaxrate.Investorsfacea20%taxrateondebtreceiptsanda15%rateonequity.DeterminethevalueofAggie.A.$120,000B.$162,948$258,537$263,080$332,14346.Giventhefollowinginformation,leveragewilladdhowmuchvaluetotheunleveredfirmperdollarofdebt?Corporatetaxrate:34%Personaltaxrateonincomefrombonds:30%Personaltaxrateonincomefromstocks:30%$-0.050$0.006$0.246$0.340$0.660Giventhefollowinginformation,leveragewilladdhowmuchvaluetotheunleveredfirmperdollarofdebt?Corporatetaxrate:34%$0.175$0.472$0.528$0.825NoneoftheaboveGiventhefollowinginformation,leveragewilladdhowmuchvaluetotheunleveredfirmperdollarofdebt?Corporatetaxrate:34%Personaltaxrateonincomefrombonds:50%$-0.050$-0.188$0.188$0.633NoneoftheaboveGiventhefollowinginformation,leveragewilladdhowmuchvaluetotheunleveredfirmperdollarofdebt?$-0.050$-0.188$0.367$0.633NoneoftheaboveTheAggieCompanyhasEBITof$70,000andmarketvaluedebtof$100,000outstandingwitha9%couponrate.Thecostofequityforanallequityfirmwouldbe14%.Aggiehasa35%corporatetaxrate.Investorsfacea20%taxrateondebtreceiptsanda15%rateonequity.$120,000$162,948$258,537$263,080$355,938SupposeaMillerequilibriumexistswithacorporatetaxrateof30%andapersonaltaxrateonincomefrombondsof35%.Whatisthepersonaltaxrateonincomefromstocks?A.0.0%B.7.1%C.10.05%45.5%NoneoftheaboveGiventhefollowinginformation,leveragewilladdhowmuchvaluetotheunleveredfirmperdollarofdebt?$-0.475$0.475$0.525$0.633NoneoftheaboveGiventhefollowinginformation,leveragewilladdhowmuchvaluetotheunleveredfirmperdollarofdebt?Corporatetaxrate:34%$-0.050$-0.188$0.367$0.588NoneoftheaboveGiventhefollowinginformation,leveragewilladdhowmuchvaluetotheunleveredfirmperdollarofdebt?Corporatetaxrate:34%Personaltaxrateonincomefrombonds:20%$-0.050$0.006$0.246$0.340$0.423Giventhefollowinginformation,leveragewilladdhowmuchvaluetotheunleveredfirmperdollarofdebt?$0.125$0.472$0.528$0.825NoneoftheaboveHollyBerryIncorporatedwillearn$40inoneyearifitdoeswell.Thedebtholdersarepromisedpaymentsof$25inoneyearifthefirmdoeswell.Ifthefirmdoespoorly,expectedearningsinoneyearwillbe$20andtherepaymentwillbe$15becauseofthedeadweightcostofbankruptcy.Theprobabilityofthefirmperformingpoorlyorwellis50%.Ifbondholdersarefullyawareofthesecostswhatwilltheypayforthedebt?Theinterestrateonthebondsis8%.$18.52$30.00$32.55$35.75$37.04HollyBerryIncorporateddebtholdersarepromisedpaymentsof$25ifthefirmdoeswell,butwillreceiveonly$20ifthefirmdoespoorly.Bondholdersarewillingtopay$15.Thepromisedreturntothebondholdersisapproximately:A.5.65%45.65%50.00%66.67%100.00%Aninvestmentisavailablethatpaysatax-free7%.Thecorporatetaxrateis40%.Ignoringrisk,whatisthepre-taxreturnontaxablebonds?A.4.20%B.7.00%7.47%11.67%NoneoftheaboveEssayQuestionsWhataretheadvantagesofaprepackagedbankruptcyforafirm?Whatarethedisadvantages?Isthereaneasilyidentifiabledebt-equityratiothatwillmaximizethevalueofafirm?Whyorwhynot?Describesomeofthesourcesofbusinessriskandfinancialrisk.Dofinancialdecisionmakershavetheabilityto"tradeoff"onetypeofriskfortheother?TheDo-All-RightMarketingResearchfirmhaspromisedpaymentstoitsbondholdersthattotal$100.Thecompanybelievesthatthereisa85%chancethatthecashflowwillbesufficienttomeettheseclaims.However,thereisa15%chancethatcashflowswillfallshort,inwhichcasetotalearningsareexpectedtobe$65.Ifthebondssellinthemarketfor$84,whatisanestimateofthebankruptcycostsforDo-All-Right?Assumeacostofdebtof10%.Establishingacapitalstructureforafirmisnotsimple.Althoughfinancialtheoryguidestheprocess,thereisnosimpleformula.Listandexplainfourmainitemsthatoneshouldconsiderindeterminingthecapitalstructure.WigdorManufacturingiscurrentlyallequityfinanced,hasanEBITof$2million,andisinthe34%taxbracket.Louis,thecompany'sfounder,istheloneshareholder.Ifthefirmweretoconvert$4millionofequityintodebtatacostof10%,whatwouldbethetotalcashflowtoLouisifheholdsallthedebt?ComparethistoLouis'totalcashflowifthefirmremainsunlevered.Assumethatallearningsarepaidoutasdividends.NowconsiderthefactthatLouismustpaypersonaltaxonthefirm'scashflow.Louispaystaxesoninterestatarateof33%,butpaystaxesondividendsatarateof28%.CalculatethetotalcashflowtoLouisafterhepayspersonaltaxes.66.Consideraneconomyinwhichtherearethreegroupsofinvestorsandnoothers.Therearenopersonaltaxesonincomefromstocks.Aninvestmentisavailablethatpaysatax-free4%.Thecorporatetaxrateis50%.Totalcorporateincomebeforeearningsandtaxes(EBIT)is$224millionforever.Whatisthemaximumdebt-to-equityratiofortheeconomyasawhole?TheAll-MineCorporationisdecidingwhethertoinvestinanewproject.Theprojectwouldhavetobefinancedbyequity,thecostis$2,000andwillreturn$2,500or25%inoneyear.Thediscountrateforbothbondsandstockis15%andthetaxrateiszero.Thepredictedcashflowsare$4,500inagoodeconomy,$3,000inanaverageeconomyand$1,000inapooreconomy.Eacheconomicoutcomeisequallylikelyandthepromiseddebtrepaymentis$3,000.Shouldthecompanytaketheproject?Whatisthevalueoffirmanditscomponentsbeforeandaftertheprojectaddition?Defineanddescribethedirectandindirectcostsofbankruptcy.Givethreeexamplesofeach.69.Whatisthepeckingordertheoryandwhataretheimplicationsthatarisefromthistheory?Chapter17CapitalStructure:LimitstotheUseofDebtAnswerKeyMultipleChoiceQuestions1.Theexplicitcosts,suchasthelegalexpenses,associatedwithcorporatedefaultareclassifiedas_____costs.flotationbetaconversiondirectbankruptcyindirectbankruptcyunleveredDifficultylevel:EasyTopic:DIRECTBANKRUPTCYCOSTSType:DEFINITIONSThecostsofavoidingabankruptcyfilingbyafinanciallydistressedfirmareclassifiedasDifficultylevel:EasyTopic:INDIRECTBANKRUPTCYCOSTSType:DEFINITIONSTheexplicitandimplicitcostsassociatedwithcorporatedefaultarereferredtoasthe_____B.defaultbetaC.directbankruptcyD.indirectbankruptcyE.financialdistressDifficultylevel:EasyTopic:FINANCIALDISTRESSCOSTSType:DEFINITIONS4.Indirectcostsoffinancialdistress:effectivelylimittheamountofequityafirmissues.serveasanincentivetoincreasethefinancialleverageofafirm.includedirectcostssuchaslegalandaccountingfees.tendtoincreaseasthedebt-equityratiodecreases.includethecostsincurredbyafirmasittriestoavoidseekingbankruptcyprotection.Difficultylevel:EasyTopic:FINANCIALDISTRESSCOSTSType:DEFINITIONSThelegalproceedingforliquidatingorreorganizingafirmoperatingindefaultiscalleda:A.tenderoffer.B.xyfight.Difficultylevel:EasyTopic:BANKRUPTCYType:DEFINITIONSThevalueofafirmismaximizedwhenthe:A.costofequityismaximized.B.taxrateiszero.C.leveredcostofcapitalismaximized.D.weightedaveragecostofcapitalisminimized.E.debt-equityratioisminimized.Difficultylevel:EasyTopic:CAPITALSTRUCTUREType:DEFINITIONSTheoptimalcapitalstructurehasbeenachievedwhenthe:A.debt-equityratioisequalto1.B.weightofequityisequaltotheweightofdebt.C.costofequityismaximizedgivenapre-taxcostofdebt.D.debt-equityratioissuchthatthecostofdebtexceedsthecostofequity.E.debt-equityratioselectedresultsinthelowestpossibleweighedaveragecostofcapital.Difficultylevel:EasyTopic:CAPITALSTRUCTUREType:DEFINITIONSInaworldwithtaxesandfinancialdistress,whenafirmisoperatingwiththeoptimalcapitalstructure:I.thedebt-equityratiowillalsobeoptimal.II.theweightedaveragecostofcapitalwillbeatitsminimalpoint.III.therequiredreturnonassetswillbeatitsmaximumpoint.IV.theincreasedbenefitfromadditionaldebtisequaltotheincreasedbankruptcycostsofthatdebt.A.IandIVonlyB.IIandIIIonlyC.IandIIonlyD.II,III,andIVonlyE.I,II,andIVonlyDifficultylevel:MediumTopic:OPTIMALCAPITALSTRUCTUREType:CONCEPTSTheoptimalcapitalstructurewilltendtoincludemoredebtforfirmswith:A.thehighestdepreciationdeductions.B.thelowestmarginaltaxrate.C.substantialtaxshieldsfromothersources.D.lowerprobabilityoffinancialdistress.E.lesstaxableincome.Difficultylevel:MediumTopic:OPTIMALCAPITALSTRUCTUREType:CONCEPTSTheoptimalcapitalstructureofafirm_____themarketedclaimsand_____thenonmarketedclaimsagainstthecashflowsofthefirm.A.minimizes;minimizesB.minimizes;maximizesC.maximizes;minimizesD.maximizes;maximizesE.equates;(leaveblank)Difficultylevel:MediumTopic:OPTIMALCAPITALSTRUCTUREType:CONCEPTS11.Theoptimalcapitalstructure:A.willbethesameforallfirmsinthesameindustry.B.willremainconstantovertimeunlessthefirmmakesanacquisition.C.ofafirmwillvaryovertimeastaxesandmarketconditionschange.D.placesmoreemphasisontheoperationsofafirmratherthanthefinancingofafirm.E.isunaffectedbychangesinthefinancialmarkets.Difficultylevel:EasyTopic:OPTIMALCAPITALSTRUCTUREType:CONCEPTSThebasiclessonofMMtheoryisthatthevalueofafirmisdependentuponthe:A.capitalstructureofthefirm.B.totalcashflowsofthefirm.C.percentageofafirmtowhichthebondholdershaveaclaim.D.taxclaimplacedonthefirmbythegovernment.E.sizeofthestockholdersclaimsonthefirm.Difficultylevel:MediumTopic:M&MTHEORYType:CONCEPTSCorporationsintheU.S.tendto:A.minimizetaxes.B.underutilizedebt.C.relylessonequityfinancingthantheyshould.D.haveextremelyhighdebt-equityratios.E.relymoreheavilyonbondsthanstocksasthemajorsourceoffinancing.Difficultylevel:EasyTopic:OBSERVEDCAPITALSTRUCTURESType:CONCEPTSIngeneral,thecapitalstructuresusedbyU.S.firms:A.tendtooverweighdebtinrelationtoequity.B.areeasilyexplainedintermsofearningsvolatility.C.areeasilyexplainedbyanalyzingthetypesofassetsownedbythevariousfirms.D.tendtobethosewhichmaximizetheuseofthefirm'savailabletaxshelters.E.varysignificantlyacrossindustries.Difficultylevel:EasyTopic:OBSERVEDCAPITALSTRUCTURESType:CONCEPTSTheMMtheorywithtaxesimpliesthatfirmsshouldissuemaximumdebt.Inpractice,thisisnottruebecause:A.debtismoreriskythanequity.B.bankruptcyisadisadvantagetodebt.C.firmswillincurlargeagencycostsofshorttermdebtbyissuinglongtermdebt.D.BothAandB.E.BothBandC.Difficultylevel:MediumTopic:OPTIMALCAPITALSTRUCTUREType:CONCEPTSAlthoughtheuseofdebtprovidestaxbenefitstothefirm,debtalsoputspressureonthefirmto:A.meetinterestandprincipalpaymentswhich,ifnotmet,canputthecompanyintofinancialdistress.B.makedividendpaymentswhichifnotmetcanputthecompanyintofinancialdistress.C.meetbothinterestanddividendpaymentswhichwhenmetincreasethefirmcashflow.D.meetincreasedtaxpaymentstherebyincreasingfirmvalue.E.Noneoftheabove.Difficultylevel:MediumTopic:DEBTINCAPITALSTRUCTUREType:CONCEPTS17.Givenrealisticestimatesoftheprobabilityandcostofbankruptcy,thefuturecostsofapossiblebankruptcyareborneby:A.allinvestorsinthefirm.B.debtholdersonlybecauseifdefaultoccursinterestandprincipalpaymentsarenotmade.C.shareholdersbecausedebtholderswillpaylessforthedebtprovidinglesscashfortheshareholders.D.managementbecauseifthefirmdefaultstheywilllosetheirjobs.E.Noneoftheabove.Difficultylevel:MediumTopic:COSTOFBANKRUPTCYType:CONCEPTSConflictsofinterestbetweenstockholdersandbondholdersareknownas:A.trusteecosts.B.financialdistresscosts.C.dealercosts.D.agencycosts.E.underwritingcosts.Difficultylevel:EasyTopic:AGENCYCOSTSType:CONCEPTSOneoftheindirectcostsofbankruptcyistheincentiveformanagerstotakelargerisks.Whenfollowingthisstrategy:A.thefirmwillrankallprojectsandtaketheprojectwhichresultsinthehighestexpectedvalueofthefirm.B.bondholdersexpropriatevaluefromstockholdersbyselectinghighriskprojects.C.stockholdersexpropriatevaluefrombondholdersbyselectinghighriskprojects.D.thefirmwillalwaystakethelowriskproject.E.BothAandB.Difficultylevel:MediumTopic:INDIRECTCOSTSOFFINANCIALDISTRESSType:CONCEPTSOneoftheindirectcoststobankruptcyistheincentivetowardunderinvestment.Followingthisstrategymayresultin:thefirmalwayschoosingprojectswiththepositiveNPVs.thefirmturningdownpositiveNPVprojectsthatitwouldclearlyacceptinanallequityfirm.stockholderscontributingthefullamountoftheinvestment,butbothstockholdersandbondholderssharinginthebenefitsoftheproject.BothAandC.BothBandC.Difficultylevel:MediumTopic:INDIRECTCOSTSOFFINANCIALDISTRESSType:CONCEPTS21.Whichofthefollowingistrue?A.Afirmwithlowanticipatedprofitwilllikelytakeonahighlevelofdebt.B.Asuccessfulfirmwillprobablytakeonzerodebt.C.Rationalfirmsraisedebtlevelswhenprofitsareexpectedtodecline.D.Rationalinvestorsarelikelytoinferahigherfirmvaluefromazerodebtlevel.E.Investorswillgenerallyviewanincreaseindebtasapositivesignforthefirm'svalue.Difficultylevel:MediumTopic:SIGNALINGType:CONCEPTSStudieshavefoundthatfirmswithhighproportionsofintangibleassetsarelikelytouseB.thesameamountoflesseithermoreorthesameamountofanyamountofdebtDifficultylevel:MediumTopic:INTANGIBLESANDDEBTType:CONCEPTSWhatthreefactorsareimportanttoconsiderindeterminingatargetdebttoequityratio?A.Taxes,assettypes,andpeckingorderandfinancialslackB.Assettypes,uncertaintyofoperatingincome,andpeckingorderandfinancialslackC.Taxes,financialslackandpeckingorder,anduncertaintyofoperatingincomeD.Taxes,assettypes,anduncertaintyofoperatingincomeE.Noneoftheabove.Difficultylevel:MediumTopic:TARGETCAPITALSTRUCTUREType:CONCEPTS24.Anexchangemayoffer:allowcustomersa30daymoney-backguaranteeonthefirm'sproduct.allowcustomersa90daywarrantyonthefirm'sproductfromdefects.allowbondholderstoexchangesomedebtforstock.allowstockholderstoexchangesomeoftheirstockfordebt.BothCandD.Difficultylevel:MediumTopic:EXCHANGEOFFERType:CONCEPTSWhichofthefollowingisnotempiricallytruewhenformulatingcapitalstructurepolicy?A.Somefirmsusenodebt.B.Mostcorporationshavelowdebt-assetratios.C.Therearenodifferencesinthecapital-structureofdifferentindustries.D.Debtlevelsacrossindustriesvarywidely.E.Debtratiosinmostcountriesareconsiderablylessthan100%.Difficultylevel:MediumTopic:CAPITALSTRUCTUREINPRACTICEType:CONCEPTSWhenshareholderspursueselfishstrategiessuchastakinglargerisksorpayingexcessivedividends,thesewillresultin:A.noactionbydebtholderssincetheseareequityholderconcerns.B.positiveagencycosts,asbondholdersimposevariousrestrictionsandcovenantswhichwilldiminishfirmvalue.C.investmentsofthesameriskclassthatthefirmisin.D.undertakingscaleenhancingprojects.E.loweragencycosts,asshareholdershavemorecontroloverthefirm'sassets.Difficultylevel:MediumTopic:AGENCYCOSTSType:CONCEPTSIndirectcostsofbankruptcyarebornprincipallyby:A.bondholders.B.stockholders.managers.thefederalgovernment.thefirm'ssuppliers.Difficultylevel:EasyTopic:INDIRECTBANKRUPTCYCOSTSType:CONCEPTSThevalueofafirminfinancialdistressisdiminishedifthefirm:A.isdeclaredbankruptandproceedstobeliquidated.B.isdeclaredinsolventandundergoesfinancialreorganization.C.isapartnership.D.BothAandC.E.BothAandB.Difficultylevel:MediumTopic:FIRMVALUEWITHFINANCIALDISTRESSType:CONCEPTSCovenantsrestrictingtheuseofleasingandadditionalborrowingsprimarilyprotect:A.theequityholdersfromaddedriskofdefault.B.thedebtholdersfromtheaddedriskofdilutionoftheirclaims.C.thedebtholdersfromthetransferofassets.D.themanagementfromhavingtopayagencycosts.E.Noneoftheabove.Difficultylevel:MediumTopic:LOANCOVENANTSType:CONCEPTSIfafirmissuesdebtbutwritesprotectiveandrestrictivecovenantsintotheloancontract,thenthefirm'sdebtmaybeissuedata_____interestratecomparedwithotherwisesimilardebt.equallowerEitherAorBDifficultylevel:MediumTopic:LOANCOVENANTSType:CONCEPTSWhengraphingfirmva