Question 1

The optimal capital structure has been achieved when the:

Accepted Answer

A)   debt-equity ratio is equal to 1.
B)   weight of equity is equal to the weight of debt.
C)   cost of equity is maximized given a pre-tax cost of debt.
D)   debt-equity ratio selected results in the lowest possible weighed average cost of capital.E) None of the above
F) C) and D)

Question 2

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 30%
Personal tax rate on income from bonds: 20%
Personal tax rate on income from stocks: 0%

Accepted Answer

A)   $0.125.
B)   $0.472.
C)   $0.528.
D)   $0.825.E) A) and B)
F) A) and C)

Question 3

The Do-All-Right Marketing Research firm has promised payments to their bondholders that total $100.The company believes that there is a 85% chance that the cash flow will be sufficient to meet these claims.However,there is a 15% chance that cash flows will fall short,in which case total earnings are expected to be $65.If the bonds sell in the market for $84,what is an estimate of the bankruptcy costs for Do-All-Right? Assume a cost of debt of 10%.

Accepted Answer

The expected amount bondholders receive ...

Question 4

When shareholders pursue selfish strategies such as taking large risks or paying excessive dividends,these will result in:

Accepted Answer

A)   no action by debtholders since these are equity holder concerns.
B)   positive agency costs, as bondholders impose various restrictions and covenants, which will diminish firm value.
C)   investments of the same risk class that the firm is in.
D)   undertaking scale enhancing projects.
E)   lower agency costs, as shareholders have more control over the firm's assets.F) C) and D)
G) D) and E)

Question 5

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34%
Personal tax rate on income from bonds: 30%
Personal tax rate on income from stocks: 30%

Accepted Answer

A)   $0.246.
B)   $0.340.
C)   $0.006.
D)   -$0.050.E) All of the above
F) A) and D)

Question 6

The value of a firm in financial distress is diminished if the firm:

Accepted Answer

A)   has no bankruptcy risk.
B)   is declared solvent and does not undergo financial reorganization.
C)   is a partnership.
D)   both is declared bankrupt and proceeds to be liquidated; and is a partnership.
E)   both is declared bankrupt and proceeds to be liquidated; and is declared insolvent and undergoes financial reorganization.F) All of the above
G) D) and E)

Question 7

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34%
Personal tax rate on income from bonds: 20%
Personal tax rate on income from stocks: 0%

Accepted Answer

A)   $0.825.
B)   $0.528.
C)   $0.175.
D)   $0.472.E) All of the above
F) None of the above

Question 8

Junk bonds is a term used to describe bonds:

Accepted Answer

A)   of highest quality.
B)   issued by junk yards.
C)   with short periods to maturity.
D)   with low yields to maturity.
E)   with relatively higher probabilities of default.F) A) and E)
G) A) and D)

Question 9

The free cash flow hypothesis states:

Accepted Answer

A)   that firms with greater free cash flow will pay more in dividends reducing the risk of financial distress.
B)   that firms with greater free cash flow should issue new equity to force managers to minimize wasting resources and to work harder.
C)   that issuing debt requires interest and principal payments reducing the potential of management to waste resources.
D)   that issuing equity reduces the potential of management to waste resources.E) None of the above
F) C) and D)

Question 10

Indirect costs of financial distress:

Accepted Answer

A)   effectively limit the amount of equity a firm issues.
B)   serve as an incentive to increase the financial leverage of a firm.
C)   include direct costs such as legal and accounting fees.
D)   include the costs incurred by a firm as it tries to avoid seeking bankruptcy protection.E) B) and C)
F) A) and C)

Question 11

The All-Mine Corporation is deciding whether to invest in a new project.The project would have to be financed by equity,the cost is $2000 and will return $2500 or 25% in one year.The discount rate for both bonds and stock is 15% and the tax rate is zero.The predicted cashflows are $4500 in a good economy,$3000 in an average,economy and $1000 in a poor economy.Each economic outcome is equally likely and the promised debt repayment is $3000.Should the company take the project? What is the value of firm and its components before and after the project addition?

Accepted Answer

Determine cashflows before the project. ...

Question 12

The optimal capital structure will tend to include more debt for firms with:

Accepted Answer

A)   the highest depreciation deductions.
B)   the lowest marginal tax rate.
C)   substantial tax shields from other sources.
D)   lower probability of financial distress.
E)   less taxable income.F) B) and D)
G) A) and E)

Exam 17: Capital Structure: Limits to the Use of Debt

The optimal capital structure has been achieved when the:

Correct Answer
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The value of a firm in financial distress is diminished if the firm:

Correct Answer
verified

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 0%

Correct Answer
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Junk bonds is a term used to describe bonds:

Correct Answer
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Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 30% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 0%

Correct Answer
verified

Correct Answer
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Determine cashflows before the project. ...
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Indirect costs of financial distress:

Correct Answer
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Correct Answer
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The expected amount bondholders receive ...
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The optimal capital structure will tend to include more debt for firms with:

Correct Answer
verified

The free cash flow hypothesis states:

Correct Answer
verified

When shareholders pursue selfish strategies such as taking large risks or paying excessive dividends,these will result in:

Correct Answer
verified

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 30% Personal tax rate on income from stocks: 30%

Correct Answer
verified

Exam 17: Capital Structure: Limits to the Use of Debt

The optimal capital structure has been achieved when the:

Correct AnswerverifiedShow Answer

The value of a firm in financial distress is diminished if the firm:

Correct AnswerverifiedShow Answer

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 0%

Correct AnswerverifiedShow Answer

Junk bonds is a term used to describe bonds:

Correct AnswerverifiedShow Answer

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 30% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 0%

Correct AnswerverifiedShow Answer

Correct AnswerverifiedDetermine cashflows before the project. ...View AnswerShow Answer

Indirect costs of financial distress:

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Correct AnswerverifiedThe expected amount bondholders receive ...View AnswerShow Answer

The optimal capital structure will tend to include more debt for firms with:

Correct AnswerverifiedShow Answer

The free cash flow hypothesis states:

Correct AnswerverifiedShow Answer

When shareholders pursue selfish strategies such as taking large risks or paying excessive dividends,these will result in:

Correct AnswerverifiedShow Answer

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 30% Personal tax rate on income from stocks: 30%

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified
Determine cashflows before the project. ...
View Answer

Correct Answer
verified

Correct Answer
verified
The expected amount bondholders receive ...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
verified

Correct Answer
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