Question 1

Market timing means that managers may sell when they believe the shares are overvalued and rely on when the shares are undervalued.

Accepted Answer

A)  new shares, debt 
B)  debt, debt 
C)  debt, shares 
D)  debt, preference shares 
A)  new shares, debt 
B)  debt, debt 
C)  debt, shares 
D)  debt, preference shares A

Question 2

What are direct costs of financial distress?

Accepted Answer

When a corporation becomes financially distressed, outside professionals, such as lawyers, appraisers, auctioneers, and others with experience in distressed assets are generally hired. These are the direct costs of financial distress.

Question 3

Which of the following statements is FALSE?

Accepted Answer

A)  By holding a portfolio of the firm's equity and its debt, we can replicate the cash flows from holding its levered equity. 
B)  The levered equity return equals the unlevered return, plus an extra "kick" due to leverage. 
C)  If a firm is unlevered, all of the free cash flows generated by its assets are available to be paid out to its equity holders. 
D)  The cost of capital of levered equity is equal to the cost of capital of unlevered equity plus a premium that is proportional to the market value debt-equity ratio. 
A)  By holding a portfolio of the firm's equity and its debt, we can replicate the cash flows from holding its levered equity. 
B)  The levered equity return equals the unlevered return, plus an extra "kick" due to leverage. 
C)  If a firm is unlevered, all of the free cash flows generated by its assets are available to be paid out to its equity holders. 
D)  The cost of capital of levered equity is equal to the cost of capital of unlevered equity plus a premium that is proportional to the market value debt-equity ratio. A

Question 4

The under-investment problem refers to the problem that equity holders prefer not to invest in positive-NPV projects in highly levered firms because

Accepted Answer

A)  future investments are contingent on debt financing. 
B)  most of the gains from the investment accrue to debt holders. 
C)  projects are contingent on equity financing. 
D)  gains are evenly shared between all stakeholders. 
A)  future investments are contingent on debt financing. 
B)  most of the gains from the investment accrue to debt holders. 
C)  projects are contingent on equity financing. 
D)  gains are evenly shared between all stakeholders.

Question 5

Which of the following statements is FALSE?

Accepted Answer

A)  As the firm borrows at the low cost of capital for debt, its equity cost of capital rises, but the net effect is that the firm's WACC is unchanged. 
B)  With perfect capital markets, a firm's WACC is dependent on its capital structure and is equal to its equity cost of capital only if the firm is unlevered. 
C)  Although debt has a lower cost of capital than equity, leverage does not lower a firm's WACC. 
D)  With no debt, the WACC is equal to the unlevered equity cost of capital. 
A)  As the firm borrows at the low cost of capital for debt, its equity cost of capital rises, but the net effect is that the firm's WACC is unchanged. 
B)  With perfect capital markets, a firm's WACC is dependent on its capital structure and is equal to its equity cost of capital only if the firm is unlevered. 
C)  Although debt has a lower cost of capital than equity, leverage does not lower a firm's WACC. 
D)  With no debt, the WACC is equal to the unlevered equity cost of capital.

Question 6

Use next year's Cash Flow Forecast for Blank Company to answer the following questions:
$\begin{array} { | l | l | } 
\hline \text { Demand } & \text { Cash Flow } \
\hline \text { Weak } & \$ 25,000 \
\hline \text { Expected } & \$ 35,000 \
\hline \text { Strong } & \$ 45,000 \
\hline
\end{array}$
-Suppose Blank Company has only one project, as forecast above, and an unlevered cost of equity of 8%. If the company borrows $10,000 at 5% to make the investment, what is the return to equity holders if demand is weak?

Accepted Answer

A)  -58.6% 
B)  -37.5% 
C)  -35.3% 
D)  8.0% 
A)  -58.6% 
B)  -37.5% 
C)  -35.3% 
D)  8.0%

Question 7

In general, the gain to investors from the tax deductibility of interest payments is referred to as the interest rate tax shield.

Accepted Answer

A) True 
 B)False

Question 8

The Trade-off Theory suggest?

Accepted Answer

A)  differences in the magnitude of financial distress costs and the volatility of cash flows cannot explain the differences in the use of leverage across industries. 
B)  there is no rational explanation for why firms choose debt levels that are too low to fully exploit the debt tax shield. 
C)  with higher costs of financial distress, it is optimal for the firm to choose higher leverage. 
D)  the firm should choose a debt level where the tax savings from increasing leverage are just offset by the increased probability of incurring the costs of financial distress. 
A)  differences in the magnitude of financial distress costs and the volatility of cash flows cannot explain the differences in the use of leverage across industries. 
B)  there is no rational explanation for why firms choose debt levels that are too low to fully exploit the debt tax shield. 
C)  with higher costs of financial distress, it is optimal for the firm to choose higher leverage. 
D)  the firm should choose a debt level where the tax savings from increasing leverage are just offset by the increased probability of incurring the costs of financial distress.

Question 9

A firm requires an investment of $20,000 and will return $26,500 after one year. If the firm borrows $5,000 at 7% what is the return on levered equity?

Accepted Answer

A)  45% 
B)  41% 
C)  39% 
D)  43% 
A)  45% 
B)  41% 
C)  39% 
D)  43%

Question 10

What are some implications of market imperfections?

Accepted Answer

Market frictions such as corpo

Question 11

A firm requires an investment of $20,000 and will return $25,000 after one year. If the firm borrows $10,000 at 7% what is the return on levered equity?

Accepted Answer

A)  37% 
B)  39% 
C)  43% 
D)  29% 
A)  37% 
B)  39% 
C)  43% 
D)  29%

Question 12

The presence of financial distress costs can explain why firms choose debt levels that are too low to exploit the interest tax shield.

Accepted Answer

A) True 
 B)False

Question 13

The presence of leverage can influence the behaviour of the managers of a firm?

Accepted Answer

A) True 
 B)False

Question 14

As the level of debt increases, the tax benefits of debt increase unti?

Accepted Answer

A)  tax shield benefits exceeds distress costs. 
B)  raw material costs exceed dividend payments. 
C)  employee costs exceed interest expense. 
D)  interest costs exceed dividend payments. 
A)  tax shield benefits exceeds distress costs. 
B)  raw material costs exceed dividend payments. 
C)  employee costs exceed interest expense. 
D)  interest costs exceed dividend payments.

Question 15

A project will give a one-time cash flow of $20,000 after one year. If the project risk requires a return of 10%, what is the levered value of the firm with perfect capital markets?

Accepted Answer

A)  $18,182 
B)  $19,000 
C)  $20,000 
D)  more information needed 
A)  $18,182 
B)  $19,000 
C)  $20,000 
D)  more information needed

Question 16

Asymmetric information implies that may have better information about a firm's cash flows than other stakeholders.

Accepted Answer

A)  debt holders 
B)  creditors 
C)  suppliers 
D)  managers 
A)  debt holders 
B)  creditors 
C)  suppliers 
D)  managers

Question 17

How does the interest paid by a firm affect its value to investors?

Accepted Answer

The interest paid by a firm is tax-deduc

Question 18

Which of the following statements is FALSE?

Accepted Answer

A)  As long as the firm's choice of securities does not change the cash flows generated by its assets, the capital structure decision will not change the total value of the firm or the amount of capital it can raise. 
B)  If securities are fairly priced, then buying or selling securities has a net present value (NPV) of zero and, therefore, should not change the value of a firm. 
C)  An investor who would like more leverage than the firm has chosen can lend and add leverage to his or her own portfolio. 
D)  The future repayments that the firm must make on its debt are equal in value to the amount of the loan it receives up front. 
A)  As long as the firm's choice of securities does not change the cash flows generated by its assets, the capital structure decision will not change the total value of the firm or the amount of capital it can raise. 
B)  If securities are fairly priced, then buying or selling securities has a net present value (NPV) of zero and, therefore, should not change the value of a firm. 
C)  An investor who would like more leverage than the firm has chosen can lend and add leverage to his or her own portfolio. 
D)  The future repayments that the firm must make on its debt are equal in value to the amount of the loan it receives up front.

Question 19

Which of the following statements is FALSE?

Accepted Answer

A)  The relative proportions of debt, equity, and other securities that a firm has outstanding constitute its capital structure. 
B)  The project's net present value (NPV) represents the value to the new investors of the firm created by the project. 
C)  When corporations raise funds from outside investors, they must choose which type of security to issue. 
D)  The most common choices are financing through equity alone and financing through a combination of debt and equity. 
A)  The relative proportions of debt, equity, and other securities that a firm has outstanding constitute its capital structure. 
B)  The project's net present value (NPV) represents the value to the new investors of the firm created by the project. 
C)  When corporations raise funds from outside investors, they must choose which type of security to issue. 
D)  The most common choices are financing through equity alone and financing through a combination of debt and equity.

Question 20

The pecking order hypothesis states that managers will have a preference to fund investment by using , followed by , and will issue as a last resort.

Accepted Answer

A)  debt, retained earnings, equity 
B)  retained earnings, equity, debt 
C)  retained earnings, debt, equity 
D)  debt, equity, retained earnings 
A)  debt, retained earnings, equity 
B)  retained earnings, equity, debt 
C)  retained earnings, debt, equity 
D)  debt, equity, retained earnings

Market timing means that managers may sell when they believe the shares are overvalued and rely on when the shares are undervalued.

What are direct costs of financial distress?

Which of the following statements is FALSE?

The under-investment problem refers to the problem that equity holders prefer not to invest in positive-NPV projects in highly levered firms because

Which of the following statements is FALSE?

In general, the gain to investors from the tax deductibility of interest payments is referred to as the interest rate tax shield.

The Trade-off Theory suggest?

A firm requires an investment of $20,000 and will return $26,500 after one year. If the firm borrows $5,000 at 7% what is the return on levered equity?

What are some implications of market imperfections?

A firm requires an investment of $20,000 and will return $25,000 after one year. If the firm borrows $10,000 at 7% what is the return on levered equity?

The presence of financial distress costs can explain why firms choose debt levels that are too low to exploit the interest tax shield.

The presence of leverage can influence the behaviour of the managers of a firm?

As the level of debt increases, the tax benefits of debt increase unti?

A project will give a one-time cash flow of $20,000 after one year. If the project risk requires a return of 10%, what is the levered value of the firm with perfect capital markets?

Asymmetric information implies that may have better information about a firm's cash flows than other stakeholders.

How does the interest paid by a firm affect its value to investors?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

The pecking order hypothesis states that managers will have a preference to fund investment by using , followed by , and will issue as a last resort.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bond Valuation

Share Valuation: the Dividend-Discount Model

Investment Decision Rules

Fundamentals of Capital Budgeting

Share Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Capital

Debt Financing

Payout Policy

Filters

Exam 16: Capital Structure

Market timing means that managers may sell when they believe the shares are overvalued and rely on when the shares are undervalued.

What are direct costs of financial distress?

Which of the following statements is FALSE?

The under-investment problem refers to the problem that equity holders prefer not to invest in positive-NPV projects in highly levered firms because

Which of the following statements is FALSE?

In general, the gain to investors from the tax deductibility of interest payments is referred to as the interest rate tax shield.

The Trade-off Theory suggest?

A firm requires an investment of $20,000 and will return $26,500 after one year. If the firm borrows $5,000 at 7% what is the return on levered equity?

What are some implications of market imperfections?

A firm requires an investment of $20,000 and will return $25,000 after one year. If the firm borrows $10,000 at 7% what is the return on levered equity?

The presence of financial distress costs can explain why firms choose debt levels that are too low to exploit the interest tax shield.

The presence of leverage can influence the behaviour of the managers of a firm?

As the level of debt increases, the tax benefits of debt increase unti?

A project will give a one-time cash flow of $20,000 after one year. If the project risk requires a return of 10%, what is the levered value of the firm with perfect capital markets?

Asymmetric information implies that may have better information about a firm's cash flows than other stakeholders.

How does the interest paid by a firm affect its value to investors?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

The pecking order hypothesis states that managers will have a preference to fund investment by using , followed by , and will issue as a last resort.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bond Valuation

Share Valuation: the Dividend-Discount Model

Investment Decision Rules

Fundamentals of Capital Budgeting

Share Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Capital

Debt Financing

Payout Policy

Filters