羅斯公司理財題庫cha17

羅斯公司理財題庫cha17羅斯公司理財題庫cha17羅斯公司理財題庫cha17xxx公司羅斯公司理財題庫cha17文件編號：文件日期：修訂次數(shù)：第1.0次更改批準(zhǔn)審核制定方案設(shè)計，管理制度Chapter17CapitalStructure:LimitstotheUseofDebt

MultipleChoiceQuestions

1.

Theexplicitcosts,suchasthelegalexpenses,associatedwithcorporatedefaultareclassifiedas_____costs.

A.

flotation

B.

betaconversion

C.

directbankruptcy

D.

indirectbankruptcy

E.

unlevered

2.

Thecostsofavoidingabankruptcyfilingbyafinanciallydistressedfirmareclassifiedas_____costs.

A.

flotation

B.

directbankruptcy

C.

indirectbankruptcy

D.

financialsolvency

E.

capitalstructure

3.

Theexplicitandimplicitcostsassociatedwithcorporatedefaultarereferredtoasthe_____costsofafirm.

A.

flotation

B.

defaultbeta

C.

directbankruptcy

D.

indirectbankruptcy

E.

financialdistress

4.

Indirectcostsoffinancialdistress:

A.

effectivelylimittheamountofequityafirmissues.

B.

serveasanincentivetoincreasethefinancialleverageofafirm.

C.

includedirectcostssuchaslegalandaccountingfees.

D.

tendtoincreaseasthedebt-equityratiodecreases.

E.

includethecostsincurredbyafirmasittriestoavoidseekingbankruptcyprotection.

5.

Thelegalproceedingforliquidatingorreorganizingafirmoperatingindefaultiscalleda:

A.

tenderoffer.

B.

bankruptcy.

C.

merger.

D.

takeover.

E.

proxyfight.

6.

Thevalueofafirmismaximizedwhenthe:

A.

costofequityismaximized.

B.

taxrateiszero.

C.

leveredcostofcapitalismaximized.

D.

weightedaveragecostofcapitalisminimized.

E.

debt-equityratioisminimized.

7.

Theoptimalcapitalstructurehasbeenachievedwhenthe:

A.

debt-equityratioisequalto1.

B.

weightofequityisequaltotheweightofdebt.

C.

costofequityismaximizedgivenapre-taxcostofdebt.

D.

debt-equityratioissuchthatthecostofdebtexceedsthecostofequity.

E.

debt-equityratioselectedresultsinthelowestpossibleweighedaveragecostofcapital.

8.

Inaworldwithtaxesandfinancialdistress,whenafirmisoperatingwiththeoptimalcapitalstructure:

I.thedebt-equityratiowillalsobeoptimal.

II.theweightedaveragecostofcapitalwillbeatitsminimalpoint.

III.therequiredreturnonassetswillbeatitsmaximumpoint.

IV.theincreasedbenefitfromadditionaldebtisequaltotheincreasedbankruptcycostsofthatdebt.

A.

IandIVonly

B.

IIandIIIonly

C.

IandIIonly

D.

II,III,andIVonly

E.

I,II,andIVonly

9.

Theoptimalcapitalstructurewilltendtoincludemoredebtforfirmswith:

A.

thehighestdepreciationdeductions.

B.

thelowestmarginaltaxrate.

C.

substantialtaxshieldsfromothersources.

D.

lowerprobabilityoffinancialdistress.

E.

lesstaxableincome.

10.

Theoptimalcapitalstructureofafirm_____themarketedclaimsand_____thenonmarketedclaimsagainstthecashflowsofthefirm.

A.

minimizes;minimizes

B.

minimizes;maximizes

C.

maximizes;minimizes

D.

maximizes;maximizes

E.

equates;(leaveblank)

11.

Theoptimalcapitalstructure:

A.

willbethesameforallfirmsinthesameindustry.

B.

willremainconstantovertimeunlessthefirmmakesanacquisition.

C.

ofafirmwillvaryovertimeastaxesandmarketconditionschange.

D.

placesmoreemphasisontheoperationsofafirmratherthanthefinancingofafirm.

E.

isunaffectedbychangesinthefinancialmarkets.

12.

ThebasiclessonofMMtheoryisthatthevalueofafirmisdependentuponthe:

A.

capitalstructureofthefirm.

B.

totalcashflowsofthefirm.

C.

percentageofafirmtowhichthebondholdershaveaclaim.

D.

taxclaimplacedonthefirmbythegovernment.

E.

sizeofthestockholdersclaimsonthefirm.

13.

Corporationsinthe.tendto:

A.

minimizetaxes.

B.

underutilizedebt.

C.

relylessonequityfinancingthantheyshould.

D.

haveextremelyhighdebt-equityratios.

E.

relymoreheavilyonbondsthanstocksasthemajorsourceoffinancing.

14.

Ingeneral,thecapitalstructuresusedby.firms:

A.

tendtooverweighdebtinrelationtoequity.

B.

areeasilyexplainedintermsofearningsvolatility.

C.

areeasilyexplainedbyanalyzingthetypesofassetsownedbythevariousfirms.

D.

tendtobethosewhichmaximizetheuseofthefirm'savailabletaxshelters.

E.

varysignificantlyacrossindustries.

15.

TheMMtheorywithtaxesimpliesthatfirmsshouldissuemaximumdebt.Inpractice,thisisnottruebecause:

A.

debtismoreriskythanequity.

B.

bankruptcyisadisadvantagetodebt.

C.

firmswillincurlargeagencycostsofshorttermdebtbyissuinglongtermdebt.

D.

BothAandB.

E.

BothBandC.

16.

Althoughtheuseofdebtprovidestaxbenefitstothefirm,debtalsoputspressureonthefirmto:

A.

meetinterestandprincipalpaymentswhich,ifnotmet,canputthecompanyintofinancialdistress.

B.

makedividendpaymentswhichifnotmetcanputthecompanyintofinancialdistress.

C.

meetbothinterestanddividendpaymentswhichwhenmetincreasethefirmcashflow.

D.

meetincreasedtaxpaymentstherebyincreasingfirmvalue.

E.

Noneoftheabove.

17.

Givenrealisticestimatesoftheprobabilityandcostofbankruptcy,thefuturecostsofapossiblebankruptcyareborneby:

A.

allinvestorsinthefirm.

B.

debtholdersonlybecauseifdefaultoccursinterestandprincipalpaymentsarenotmade.

C.

shareholdersbecausedebtholderswillpaylessforthedebtprovidinglesscashfortheshareholders.

D.

managementbecauseifthefirmdefaultstheywilllosetheirjobs.

E.

Noneoftheabove.

18.

Conflictsofinterestbetweenstockholdersandbondholdersareknownas:

A.

trusteecosts.

B.

financialdistresscosts.

C.

dealercosts.

D.

agencycosts.

E.

underwritingcosts.

19.

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.

22.

Studieshavefoundthatfirmswithhighproportionsofintangibleassetsarelikelytouse____________debtcomparedwithfirmswithlowproportionsofintangibleassets.

A.

more

B.

thesameamountof

C.

less

D.

eithermoreorthesameamountof

E.

anyamountofdebt

23.

Whatthreefactorsareimportanttoconsiderindeterminingatargetdebttoequityratio

A.

Taxes,assettypes,andpeckingorderandfinancialslack

B.

Assettypes,uncertaintyofoperatingincome,andpeckingorderandfinancialslack

C.

Taxes,financialslackandpeckingorder,anduncertaintyofoperatingincome

D.

Taxes,assettypes,anduncertaintyofoperatingincome

E.

Noneoftheabove.

24.

Anexchangemayoffer:

A.

allowcustomersa30daymoney-backguaranteeonthefirm'sproduct.

B.

allowcustomersa90daywarrantyonthefirm'sproductfromdefects.

C.

allowbondholderstoexchangesomedebtforstock.

D.

allowstockholderstoexchangesomeoftheirstockfordebt.

E.

BothCandD.

25.

Whichofthefollowingisnotempiricallytruewhenformulatingcapitalstructurepolicy

A.

Somefirmsusenodebt.

B.

Mostcorporationshavelowdebt-assetratios.

C.

Therearenodifferencesinthecapital-structureofdifferentindustries.

D.

Debtlevelsacrossindustriesvarywidely.

E.

Debtratiosinmostcountriesareconsiderablylessthan100%.

26.

Whenshareholderspursueselfishstrategiessuchastakinglargerisksorpayingexcessivedividends,thesewillresultin:

A.

noactionbydebtholderssincetheseareequityholderconcerns.

B.

positiveagencycosts,asbondholdersimposevariousrestrictionsandcovenantswhichwilldiminishfirmvalue.

C.

investmentsofthesameriskclassthatthefirmisin.

D.

undertakingscaleenhancingprojects.

E.

loweragencycosts,asshareholdershavemorecontroloverthefirm'sassets.

27.

Indirectcostsofbankruptcyarebornprincipallyby:

A.

bondholders.

B.

stockholders.

C.

managers.

D.

thefederalgovernment.

E.

thefirm'ssuppliers.

28.

Thevalueofafirminfinancialdistressisdiminishedifthefirm:

A.

isdeclaredbankruptandproceedstobeliquidated.

B.

isdeclaredinsolventandundergoesfinancialreorganization.

C.

isapartnership.

D.

BothAandC.

E.

BothAandB.

29.

Covenantsrestrictingtheuseofleasingandadditionalborrowingsprimarilyprotect:

A.

theequityholdersfromaddedriskofdefault.

B.

thedebtholdersfromtheaddedriskofdilutionoftheirclaims.

C.

thedebtholdersfromthetransferofassets.

D.

themanagementfromhavingtopayagencycosts.

E.

Noneoftheabove.

30.

Ifafirmissuesdebtbutwritesprotectiveandrestrictivecovenantsintotheloancontract,thenthefirm'sdebtmaybeissuedata_____interestratecomparedwithotherwisesimilardebt.

A.

significantlyhigher

B.

slightlyhigher

C.

equal

D.

lower

E.

EitherAorB

31.

Whengraphingfirmvalueagainstdebtlevels,thedebtlevelthatmaximizesthevalueofthefirmisthelevelwhere:

A.

theincreaseinthepresentvalueofdistresscostsfromanadditionaldollarofdebtisgreaterthantheincreaseinthepresentvalueofthedebttaxshield.

B.

theincreaseinthepresentvalueofdistresscostsfromanadditionaldollarofdebtisequaltotheincreaseinthepresentvalueofthedebttaxshield.

C.

theincreaseinthepresentvalueofdistresscostsfromanadditionaldollarofdebtislessthantheincreaseofthepresentvalueofthedebttaxshield.

D.

distresscostsaswellasdebttaxshieldsarezero.

E.

distresscostsaswellasdebttaxshieldsaremaximized.

32.

Whenfirmsissuemoredebt,thetaxshieldondebt_____,theagencycostsondebt.,costsoffinancialdistress)_____,andtheagencycostsonequity_____.

A.

increases;increase;increase

B.

decreases;decrease;decrease

C.

increases;increase;decrease

D.

decreases;decrease;increase

E.

increases;decrease;decrease

33.

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.

35.

Thepeckingorderstateshowfinancingshouldberaised.Inordertoavoidasymmetricinformationproblemsandmisinterpretationofwhethermanagementissendingasignalonsecurityovervaluation,thefirm'sfirstruleisto:

A.

financewithinternallygeneratedfunds.

B.

alwaysissuedebtthenthemarketwon'tknowwhenmanagementthinksthesecurityisovervalued.

C.

issuenewequityfirst.

D.

issuedebtfirst.

E.

Noneoftheabove.

36.

Growthopportunities_______the_____ofdebtfinancing.

A.

increase;advantage

B.

decrease;advantage

C.

decrease;disadvantage

D.

BothAandC

E.

Noneoftheabove

37.

Whichofthefollowingindustrieswouldtendtohavethehighestleverage

A.

Drugs

B.

Computer

C.

Paper

D.

Electronics

E.

Biologicalproducts

38.

Theintroductionofpersonaltaxesmayrevealadisadvantagetotheuseofdebtifthe:

A.

personaltaxrateonthedistributionofincometostockholdersislessthanthepersonaltaxrateoninterestincome.

B.

personaltaxrateonthedistributionofincometostockholdersisgreaterthanthepersonaltaxrateoninterestincome.

C.

personaltaxrateonthedistributionofincometostockholdersisequaltothepersonaltaxrateoninterestincome.

D.

personaltaxrateoninterestincomeiszero.

E.

Noneoftheabove.

39.

InMiller'smodel,whenthequantity[(1-Tc)(1-Ts)=(1-Tb)],then:

A.

thefirmshouldholdnodebt.

B.

thevalueoftheleveredfirmisgreaterthanthevalueoftheunleveredfirm.

C.

thetaxshieldondebtisexactlyoffsetbyhigherpersonaltaxespaidoninterestincome.

D.

thetaxshieldondebtisexactlyoffsetbyhigherlevelsofdividends.

E.

thetaxshieldondebtisexactlyoffsetbyhighercapitalgains.

40.

InaMillerequilibrium,whattypeofinvestmentsdohightaxbracketinvestorstendtohold

A.

Bonds

B.

Stocks

C.

Debentures

D.

Bothstocksandbonds.

E.

Neitherstocksnorbonds.

41.

TheTrunkLineCompanywillearn$60inoneyearifitdoeswell.Thedebtholdersarepromisedpaymentsof$35inoneyearifthefirmdoeswell.Ifthefirmdoespoorly,expectedearningsinoneyearwillbe$30andtherepaymentwillbe$20becauseofthedeadweightcostofbankruptcy.Theprobabilityofthefirmperformingpoorlyorwellis50%.IfbondholdersarefullyawareofthesecostswhatwilltheypayforthedebtTheinterestrateonthebondsis10%.

A.

$

B.

$

C.

$

D.

$

E.

$

42.

TheTrunkLineCompanydebtholdersarepromisedpaymentsof$35ifthefirmdoeswell,butwillreceiveonly$20ifthefirmdoespoorly.Bondholdersarewillingtopay$25.Thepromisedreturntothebondholdersisapproximately:

A.

%

B.

%

C.

%

D.

%

E.

100%

43.

Aninvestmentisavailablethatpaysatax-free6%.Thecorporatetaxrateis30%.Ignoringrisk,whatisthepre-taxreturnontaxablebonds

A.

%

B.

%

C.

%

D.

%

E.

Noneoftheabove.

44.

Yourfirmhasadebt-equityratioof.60.Yourcostofequityis11%andyourafter-taxcostofdebtis7%.Whatwillyourcostofequitybeifthetargetcapitalstructurebecomesa50/50mixofdebtandequity

A.

%

B.

%

C.

%

D.

%

E.

%

45.

TheAggieCompanyhasEBITof$50,000andmarketvaluedebtof$100,000outstandingwitha9%couponrate.Thecostofequityforanallequityfirmwouldbe14%.Aggiehasa35%corporatetaxrate.Investorsfacea20%taxrateondebtreceiptsanda15%rateonequity.DeterminethevalueofAggie.

A.

$120,000

B.

$162,948

C.

$258,537

D.

$263,080

E.

$332,143

46.

Giventhefollowinginformation,leveragewilladdhowmuchvaluetotheunleveredfirmperdollarofdebt？

Corporatetaxrate:34%

Personaltaxrateonincomefrombonds:30%

Personaltaxrateonincomefromstocks:30%

A.

$

B.

$

C.

$

D.

$

E.

$

47.

Giventhefollowinginformation,leveragewilladdhowmuchvaluetotheunleveredfirmperdollarofdebt？

Corporatetaxrate:34%

Personaltaxrateonincomefrombonds:20%

Personaltaxrateonincomefromstocks:0%

A.

$

B.

$

C.

$

D.

$

E.

Noneoftheabove

48.

Giventhefollowinginformation,leveragewilladdhowmuchvaluetotheunleveredfirmperdollarofdebt？

Corporatetaxrate:34%

Personaltaxrateonincomefrombonds:50%

Personaltaxrateonincomefromstocks:10%

A.

$

B.

$

C.

$

D.

$

E.

Noneoftheabove

49.

Giventhefollowinginformation,leveragewilladdhowmuchvaluetotheunleveredfirmperdollarofdebt？

Corporatetaxrate:34%

Personaltaxrateonincomefrombonds:10%

Personaltaxrateonincomefromstocks:50%

A.

$

B.

$

C.

$

D.

$

E.

Noneoftheabove

50.

TheAggieCompanyhasEBITof$70,000andmarketvaluedebtof$100,000outstandingwitha9%couponrate.Thecostofequityforanallequityfirmwouldbe14%.Aggiehasa35%corporatetaxrate.Investorsfacea20%taxrateondebtreceiptsanda15%rateonequity.DeterminethevalueofAggie.

A.

$120,000

B.

$162,948

C.

$258,537

D.

$263,080

E.

$355,938

51.

SupposeaMillerequilibriumexistswithacorporatetaxrateof30%andapersonaltaxrateonincomefrombondsof35%.Whatisthepersonaltaxrateonincomefromstocks

A.

%

B.

%

C.

%

D.

%

E.

Noneoftheabove

52.

Giventhefollowinginformation,leveragewilladdhowmuchvaluetotheunleveredfirmperdollarofdebt？

Corporatetaxrate:40%

Personaltaxrateonincomefrombonds:20%

Personaltaxrateonincomefromstocks:30%

A.

$

B.

$

C.

$

D.

$

E.

Noneoftheabove

53.

Giventhefollowinginformation,leveragewilladdhowmuchvaluetotheunleveredfirmperdollarofdebt？

Corporatetaxrate:34%

Personaltaxrateonincomefrombonds:20%

Personaltaxrateonincomefromstocks:50%

A.

$

B.

$

C.

$

D.

$

E.

Noneoftheabove

54.

Giventhefollowinginformation,leveragewilladdhowmuchvaluetotheunleveredfirmperdollarofdebt？

Corporatetaxrate:34%

Personaltaxrateonincomefrombonds:20%

Personaltaxrateonincomefromstocks:30%

A.

$

B.

$

C.

$

D.

$

E.

$

55.

Giventhefollowinginformation,leveragewilladdhowmuchvaluetotheunleveredfirmperdollarofdebt？

Corporatetaxrate:30%

Personaltaxrateonincomefrombonds:20%

Personaltaxrateonincomefromstocks:0%

A.

$

B.

$

C.

$

D.

$

E.

Noneoftheabove

56.

HollyBerryIncorporatedwillearn$40inoneyearifitdoeswell.Thedebtholdersarepromisedpaymentsof$25inoneyearifthefirmdoeswell.Ifthefirmdoespoorly,expectedearningsinoneyearwillbe$20andtherepaymentwillbe$15becauseofthedeadweightcostofbankruptcy.Theprobabilityofthefirmperformingpoorlyorwellis50%.IfbondholdersarefullyawareofthesecostswhatwilltheypayforthedebtTheinterestrateonthebondsis8%.

A.

$

B.

$

C.

$

D.

$

E.

$

57.

HollyBerryIncorporateddebtholdersarepromisedpaymentsof$25ifthefirmdoeswell,butwillreceiveonly$20ifthefirmdoespoorly.Bondholdersarewillingtopay$15.Thepromisedreturntothebondholdersisapproximately:

A.

%

B.

%

C.

%

D.

%

E.

%

58.

Aninvestmentisavailablethatpaysatax-free7%.Thecorporatetaxrateis40%.Ignoringrisk,whatisthepre-taxreturnontaxablebonds

A.

%

B.

%

C.

%

D.

%

E.

Noneoftheabove

EssayQuestions

59.

WhataretheadvantagesofaprepackagedbankruptcyforafirmWhatarethedisadvantages

60.

Isthereaneasilyidentifiabledebt-equityratiothatwillmaximizethevalueofafirmWhyorwhynot

61.

Describesomeofthesourcesofbusinessriskandfinancialrisk.Dofinancialdecisionmakershavetheabilityto"tradeoff"onetypeofriskfortheother

62.

TheDo-All-RightMarketingResearchfirmhaspromisedpaymentstoitsbondholdersthattotal$100.Thecompanybelievesthatthereisa85%chancethatthecashflowwillbesufficienttomeettheseclaims.However,thereisa15%chancethatcashflowswillfallshort,inwhichcasetotalearningsareexpectedtobe$65.Ifthebondssellinthemarketfor$84,whatisanestimateofthebankruptcycostsforDo-All-RightAssumeacostofdebtof10%.

63.

Establishingacapitalstructureforafirmisnotsimple.Althoughfinancialtheoryguidestheprocess,thereisnosimpleformula.Listandexplainfourmainitemsthatoneshouldconsiderindeterminingthecapitalstructure.

WigdorManufacturingiscurrentlyallequityfinanced,hasanEBITof$2million,andisinthe34%taxbracket.Louis,thecompany'sfounder,istheloneshareholder.

64.

Ifthefirmweretoconvert$4millionofequityintodebtatacostof10%,whatwouldbethetotalcashflowtoLouisifheholdsallthedebtComparethistoLouis'totalcashflowifthefirmremainsunlevered.

65.

Assumethatallearningsarepaidoutasdividends.NowconsiderthefactthatLouismustpaypersonaltaxonthefirm'scashflow.Louispaystaxesoninterestatarateof33%,butpaystaxesondividendsatarateof28%.CalculatethetotalcashflowtoLouisafterhepayspersonaltaxes.

66.

Consideraneconomyinwhichtherearethreegroupsofinvestorsandnoothers.

Therearenopersonaltaxesonincomefromstocks.Aninvestmentisavailablethatpaysatax-free4%.Thecorporatetaxrateis50%.Totalcorporateincomebeforeearningsandtaxes(EBIT)is$224millionforever.Whatisthemaximumdebt-to-equityratiofortheeconomyasawhole

67.

TheAll-MineCorporationisdecidingwhethertoinvestinanewproject.Theprojectwouldhavetobefinancedbyequity,thecostis$2,000andwillreturn$2,500or25%inoneyear.Thediscountrateforbothbondsandstockis15%andthetaxrateiszero.Thepredictedcashflowsare$4,500inagoodeconomy,$3,000inanaverageeconomyand$1,000inapooreconomy.Eacheconomicoutcomeisequallylikelyandthepromiseddebtrepaymentis$3,000.ShouldthecompanytaketheprojectWhatisthevalueoffirmanditscomponentsbeforeandaftertheprojectaddition

68.

Defineanddescribethedirectandindirectcostsofbankruptcy.Givethreeexamplesofeach.

69.

Whatisthepeckingordertheoryandwhataretheimplicationsthatarisefromthistheory

Chapter17CapitalStructure:LimitstotheUseofDebtAnswerKey

MultipleChoiceQuestions

1.

Theexplicitcosts,suchasthelegalexpenses,associatedwithcorporatedefaultareclassifiedas_____costs.

A.

flotation

B.

betaconversion

C.

directbankruptcy

D.

indirectbankruptcy

E.

unlevered

Difficultylevel:Easy

Topic:DIRECTBANKRUPTCYCOSTS

Type:DEFINITIONS

2.

Thecostsofavoidingabankruptcyfilingbyafinanciallydistressedfirmareclassifiedas_____costs.

A.

flotation

B.

directbankruptcy

C.

indirectbankruptcy

D.

financialsolvency

E.

capitalstructure

Difficultylevel:Easy

Topic:INDIRECTBANKRUPTCYCOSTS

Type:DEFINITIONS

3.

Theexplicitandimplicitcostsassociatedwithcorporatedefaultarereferredtoasthe_____costsofafirm.

A.

flotation

B.

defaultbeta

C.

directbankruptcy

D.

indirectbankruptcy

E.

financialdistress

Difficultylevel:Easy

Topic:FINANCIALDISTRESSCOSTS

Type:DEFINITIONS

4.

Indirectcostsoffinancialdistress:

A.

effectivelylimittheamountofequityafirmissues.

B.

serveasanincentivetoincreasethefinancialleverageofafirm.

C.

includedirectcostssuchaslegalandaccountingfees.

D.

tendtoincreaseasthedebt-equityratiodecreases.

E.

includethecostsincurredbyafirmasittriestoavoidseekingbankruptcyprotection.

Difficultylevel:Easy

Topic:FINANCIALDISTRESSCOSTS

Type:DEFINITIONS

5.

Thelegalproceedingforliquidatingorreorganizingafirmoperatingindefaultiscalleda:

A.

tenderoffer.

B.

bankruptcy.

C.

merger.

D.

takeover.

E.

proxyfight.

Difficultylevel:Easy

Topic:BANKRUPTCY

Type:DEFINITIONS

6.

Thevalueofafirmismaximizedwhenthe:

A.

costofequityismaximized.

B.

taxrateiszero.

C.

leveredcostofcapitalismaximized.

D.

weightedaveragecostofcapitalisminimized.

E.

debt-equityratioisminimized.

Difficultylevel:Easy

Topic:CAPITALSTRUCTURE

Type:DEFINITIONS

7.

Theoptimalcapitalstructurehasbeenachievedwhenthe:

A.

debt-equityratioisequalto1.

B.

weightofequityisequaltotheweightofdebt.

C.

costofequityismaximizedgivenapre-taxcostofdebt.

D.

debt-equityratioissuchthatthecostofdebtexceedsthecostofequity.

E.

debt-equityratioselectedresultsinthelowestpossibleweighedaveragecostofcapital.

Difficultylevel:Easy

Topic:CAPITALSTRUCTURE

Type:DEFINITIONS

8.

Inaworldwithtaxesandfinancialdistress,whenafirmisoperatingwiththeoptimalcapitalstructure:

I.thedebt-equityratiowillalsobeoptimal.

II.theweightedaveragecostofcapitalwillbeatitsminimalpoint.

III.therequiredreturnonassetswillbeatitsmaximumpoint.

IV.theincreasedbenefitfromadditionaldebtisequaltotheincreasedbankruptcycostsofthatdebt.

A.

IandIVonly

B.

IIandIIIonly

C.

IandIIonly

D.

II,III,andIVonly

E.

I,II,andIVonly

Difficultylevel:Medium

Topic:OPTIMALCAPITALSTRUCTURE

Type:CONCEPTS

9.

Theoptimalcapitalstructurewilltendtoincludemoredebtforfirmswith:

A.

thehighestdepreciationdeductions.

B.

thelowestmarginaltaxrate.

C.

substantialtaxshieldsfromothersources.

D.

lowerprobabilityoffinancialdistress.

E.

lesstaxableincome.

Difficultylevel:Medium

Topic:OPTIMALCAPITALSTRUCTURE

Type:CONCEPTS

10.

Theoptimalcapitalstructureofafirm_____themarketedclaimsand_____thenonmarketedclaimsagainstthecashflowsofthefirm.

A.

minimizes;minimizes

B.

minimizes;maximizes

C.

maximizes;minimizes

D.

maximizes;maximizes

E.

equates;(leaveblank)

Difficultylevel:Medium

Topic:OPTIMALCAPITALSTRUCTURE

Type:CONCEPTS

11.

Theoptimalcapitalstructure:

A.

willbethesameforallfirmsinthesameindustry.

B.

willremainconstantovertimeunlessthefirmmakesanacquisition.

C.

ofafirmwillvaryovertimeastaxesandmarketconditionschange.

D.

placesmoreemphasisontheoperationsofafirmratherthanthefinancingofafirm.

E.

isunaffectedbychangesinthefinancialmarkets.

Difficultylevel:Easy

Topic:OPTIMALCAPITALSTRUCTURE

Type:CONCEPTS

12.

ThebasiclessonofMMtheoryisthatthevalueofafirmisdependentuponthe:

A.

capitalstructureofthefirm.

B.

totalcashflowsofthefirm.

C.

percentageofafirmtowhichthebondholdershaveaclaim.

D.

taxclaimplacedonthefirmbythegovernment.

E.

sizeofthestockholdersclaimsonthefirm.

Difficultylevel:Medium

Topic:M&MTHEORY

Type:CONCEPTS

13.

Corporationsinthe.tendto:

A.

minimizetaxes.

B.

underutilizedebt.

C.

relylessonequityfinancingthantheyshould.

D.

haveextremelyhighdebt-equityratios.

E.

relymoreheavilyonbondsthanstocksasthemajorsourceoffinancing.

Difficultylevel:Easy

Topic:OBSERVEDCAPITALSTRUCTURES

Type:CONCEPTS

14.

Ingen