Filters
Question type
Study Flashcards

The fact that some managers are more aggressive in their use of debt financing in attempting to boost profits does not influence the optimal or value-maximizing capital structure.

A) True
B) False

Correct Answer

verifed

verified

The optimal capital structure is the one that maximizes the price of the stock,which always calls for a debt/asset ratio that is lower than the one that maximizes EPS.

A) True
B) False

Correct Answer

verifed

verified

In theory,dividends are determined as a residual item.Therefore,the better the firm's investment opportunities,the lower its dividend payments should be.

A) True
B) False

Correct Answer

verifed

verified

According to the signaling theory of capital structure,a firm with favorable prospects should raise new capital by issuing ____ and a firm with unfavorable prospects raise new capital by issuing ____.


A) debt;equity
B) equity;debt
C) debt;debt
D) equity;equity

E) All of the above
F) A) and B)

Correct Answer

verifed

verified

The weighted average cost of capital (WACC)declines as more of the lowest cost component is added.What limits a firm from using nearly all debt is that as the debt-to-assets ratio rises,the absolute interest expense gets very large.The large interest expense reduces income and results in a debt-to-assets ratio limit even though the WACC continues to decline.

A) True
B) False

Correct Answer

verifed

verified

If we include the cost of bankruptcy in the MM analysis of capital structure in a world with taxes,we would tend to believe that the cost of debt increases as leverage increases and that there is probably an optimal capital structure.

A) True
B) False

Correct Answer

verifed

verified

Which of the following factors do not have an impact on the business risk of a firm?


A) Sales variability
B) Input price variability
C) Price elasticity
D) Operating leverage
E) All of the above impact a firm's business risk

F) C) and D)
G) All of the above

Correct Answer

verifed

verified

Strategic Systems Inc.expects to have net income of $800,000 during the next year.Its target,and current,capital structure is 40 percent debt and 60 percent common equity.The Director of Capital Budgeting has determined that the optimal capital budget for next year is $1.2 million.If Strategic uses the residual dividend model to determine next year's dividend payout,what is the expected payout ratio?


A) 0%
B) 10%
C) 28%
D) 42%
E) 56%

F) A) and E)
G) C) and E)

Correct Answer

verifed

verified

Which of the following statements is correct?


A) "Business risk" is differentiated from "financial risk" by the fact that financial risk reflects only the use of debt,while business risk reflects both the use of debt and such factors as sales variability,cost variability,and operating leverage.
B) If corporate tax rates were decreased while other things were held constant,and if the Modigliani-Miller tradeoff theory of capital structure were correct,then corporations should tend to increase their use of debt.
C) If corporate tax rates were decreased while other things were held constant,and if the Modigliani-Miller tradeoff theory of capital structure were correct,then corporations should tend to decrease their use of debt.
D) The optimal capital structure is the one which (1) maximizes the price of the firm's stock, (2) minimizes its WACC,and (3) maximizes its EPS.
E) Statements b and d are both correct.

F) D) and E)
G) None of the above

Correct Answer

verifed

verified

A decrease in the debt-to-assets ratio will generally have no effect on ____ risk.


A) Financial
B) Total
C) Business
D) Systematic,or market
E) None of the above (it will affect each type of risk above) .

F) A) and E)
G) A) and D)

Correct Answer

verifed

verified

Copybold Corporation Copybold Corporation is a start-up firm considering two alternative capital structures⎯one is conservative and the other aggressive. The conservative capital structure calls for a D/A ratio = 0.25, while the aggressive strategy call for D/A = 0.75. Once the firm selects its target capital structure it envisions two possible scenarios for its operations: Feast or Famine. The Feast scenario has a 60 percent probability of occurring and forecast EBIT in this state is $60,000. The Famine state has a 40 percent chance of occurring and the EBIT is expected to be $20,000. Further, if the firm selects the conservative capital structure its cost of debt will be 10 percent, while with the aggressive capital structure its debt cost will be 12 percent. The firm will have $400,000 in total assets, it will face a 40 percent marginal tax rate, and the book value of equity per share under either scenario is $10.00 per share -Refer to Copybold Corporation.What is the difference between the EPS forecasts for Feast and Famine under the conservative capital structure?


A) $1.00
B) $0.80
C) $2.20
D) $0.44
E) $0

F) A) and E)
G) None of the above

Correct Answer

verifed

verified

In a world with no taxes,MM show that the capital structure of a firm does not affect the value of the firm.However,when taxes are considered,MM show a positive relationship between debt and firm value.

A) True
B) False

Correct Answer

verifed

verified

Changing the capital structure of the firm will affect the riskiness inherent in the firm's common stock,which will affect the return demanded by stockholders and the stock's

A) True
B) False

Correct Answer

verifed

verified

Which of the following factors does not affect a firm's business risk?


A) Demand variability.
B) Input price variability.
C) Interest cost variability.
D) Operating leverage.
E) Sales price variability.

F) C) and E)
G) A) and B)

Correct Answer

verifed

verified

From the information below,select the optimal capital structure for Minnow Entertainment Company.


A) Debt = 40%;Equity = 60%;EPS = $2.95;Stock price = $26.50.
B) Debt = 50%;Equity = 50%;EPS = $3.05;Stock price = $28.90.
C) Debt = 60%;Equity = 40%;EPS = $3.18;Stock price = $31.20.
D) Debt = 80%;Equity = 20%;EPS = $3.42;Stock price = $30.40.
E) Debt = 70%;Equity = 30%;EPS = $3.31;Stock price = $30.00.

F) C) and E)
G) A) and D)

Correct Answer

verifed

verified

The level of sales at which expected EPS will be the same regardless of whether the firm uses debt or common stock financing is called the EPS indifference point.

A) True
B) False

Correct Answer

verifed

verified

The announcement of an increase in the cash dividend always causes an increase in the price of the firm's common stock.

A) True
B) False

Correct Answer

verifed

verified

If you know that your firm is facing relatively poor prospects but needs new capital,and you know that investors do not have this information,signaling theory would predict that you would


A) Issue debt to maintain the returns of equity holders.
B) Issue equity to share the burden of decreased equity returns between old and new shareholders.
C) Be indifferent between issuing debt and equity.
D) Postpone going into capital markets until your firm's prospects improve.
E) Convey your inside information to investors using the media to eliminate the information asymmetry.

F) A) and B)
G) A) and C)

Correct Answer

verifed

verified

The firm's target capital structure is consistent with which of the following?


A) Maximum earnings per share.
B) Minimum cost of debt (rd) .
C) Minimum risk.
D) Minimum cost of equity (rs) .
E) Minimum weighted average cost of capital.

F) C) and E)
G) A) and E)

Correct Answer

verifed

verified

The most commonly held view of capital structure,according to the text,is that the weighted average cost of capital


A) First falls with moderate levels of leverage and then increases.
B) Does not change with leverage.
C) Increases proportionately with increases in leverage.
D) Increases with moderate amounts of leverage and then falls.
E) None of the above.

F) D) and E)
G) C) and D)

Correct Answer

verifed

verified

Showing 21 - 40 of 120

Related Exams

Exam 1

An Overview of Finance

42 Questions

Exam 2

Financial Assets Instruments

111 Questions

Exam 3

Financial Markets and the Investment Banking Process

47 Questions

Exam 4

Financial Intermediaries and the Banking System

98 Questions

Exam 5

The Cost of Money Interest Rates

65 Questions

Exam 6

Business Organizations and the Tax Environment

96 Questions

Exam 7

Analysis of Financial Statements

123 Questions

Exam 8

Financial Planning and Control

122 Questions

Exam 9

Time Value of Money

132 Questions

Exam 10

Valuation Concepts

126 Questions

Exam 11

Risk and Rates of Return

104 Questions

Exam 12

The Cost of Capital

114 Questions

Exam 13

Capital Budgeting

192 Questions

Exam 15

Working Capital Management

174 Questions

Exam 16

Investment and Securities

102 Questions

Exam 17

Investment Analysis and Valuation Techniques

108 Questions

Show Answer