Question 1

A firm requires an investment of $20,000 and borrows $10,000 at 8%. If the return on equity is 20% and the tax rate is 30%, what is the firm's WACC?

Accepted Answer

A)  13.2% 
B)  11.4% 
C)  12.8% 
D)  12..1% 
A)  13.2% 
B)  11.4% 
C)  12.8% 
D)  12..1%

Question 2

Leverage can a firm's expected earnings per share, but does not necessarily increase the share price.

Accepted Answer

A)  dilute 
B)  decrease 
C)  not change 
D)  increase 
A)  dilute 
B)  decrease 
C)  not change 
D)  increase

Question 3

Aside from the direct costs of bankruptcy, a firm may also incur other indirect costs such a?

Accepted Answer

A)  loss of interest receipts. 
B)  increase in raw material costs. 
C)  loss of dividend receipts. 
D)  loss of customers and loss of suppliers. 
A)  loss of interest receipts. 
B)  increase in raw material costs. 
C)  loss of dividend receipts. 
D)  loss of customers and loss of suppliers.

Question 4

A firm'?

Accepted Answer

A)  asset 
B)  debt-to-value 
C)  debt-to-equity 
D)  liability 
A)  asset 
B)  debt-to-value 
C)  debt-to-equity 
D)  liability

Question 5

Which of the following statements is FALSE?

Accepted Answer

A)  When a firm issues new shares that account for a significant percentage of its outstanding shares, the transaction is called a leveraged recapitalisation. 
B)  By choosing positive-NPV projects that are worth more than their initial investment, the firm can enhance its value. 
C)  MM Proposition I applies to capital structure decisions made at any time during the life of the firm. 
D)  The choice of capital structure does not change the value of the firm if the cash flows generated by the firm's assets are assumed to remain constant. 
A)  When a firm issues new shares that account for a significant percentage of its outstanding shares, the transaction is called a leveraged recapitalisation. 
B)  By choosing positive-NPV projects that are worth more than their initial investment, the firm can enhance its value. 
C)  MM Proposition I applies to capital structure decisions made at any time during the life of the firm. 
D)  The choice of capital structure does not change the value of the firm if the cash flows generated by the firm's assets are assumed to remain constant.

Question 6

The relative proportions of debt, equity, and other securities that a firm has outstanding constitute
its

Accepted Answer

A)  leverage. 
B)  capital structure. 
C)  retained earnings. 
D)  paid out capital. 
A)  leverage. 
B)  capital structure. 
C)  retained earnings. 
D)  paid out capital.

Question 7

A firm has a market value of assets of $50,000. It borrows $10,000 at 3%. If the unlevered cost of equity is 15%, what is the firm's cost of equity capital?

Accepted Answer

A)  18% 
B)  16% 
C)  19% 
D)  17% 
A)  18% 
B)  16% 
C)  19% 
D)  17%

Question 8

Managers should conside?

Accepted Answer

A)  internal equity 
B)  long-term debt 
C)  retained earnings 
D)  short-term debt 
A)  internal equity 
B)  long-term debt 
C)  retained earnings 
D)  short-term debt

Question 9

Which of the following do firms consider in the choice of securities issued?

Accepted Answer

A)  whether the chosen security will have a fair price in the market 
B)  the transactions costs of the chosen security 
C)  the tax consequences of the chosen security 
D)  All of the above are considered. 
A)  whether the chosen security will have a fair price in the market 
B)  the transactions costs of the chosen security 
C)  the tax consequences of the chosen security 
D)  All of the above are considered.

Question 10

What are the issues in determining the optimal leverage for a firm?

Accepted Answer

While the interest tax shield tends to i

Question 11

What role do industries play in the capital structure choice for a firm?

Accepted Answer

Industries are found to have d

Question 12

What are indirect costs of financial distress?

Accepted Answer

Indirect costs of financial di

Question 13

Suppose a project financed via an issue of debt requires six annual interest payments of $20 million each year. If the tax rate is 30% and the cost of debt is 8%, what is the value of the interest rate tax shield?

Accepted Answer

A)  $32.64 million 
B)  $23.20 million 
C)  $31.35 million 
D)  $27.74 million 
A)  $32.64 million 
B)  $23.20 million 
C)  $31.35 million 
D)  $27.74 million

Question 14

Which of the following equations would NOT be appropriate to use in a firm with risky debt?

Accepted Answer

A) $\beta _ { U } = \frac { E } { E + D } \beta _ { E } + \frac { D } { E + D } \beta _ { D }$ 
B) $\beta U = \beta _ { E ^ { + } } \frac { D } { E } \left( \beta U - \beta _ { D } \right)$ 
C) $\beta _ { E } = \beta U + \frac { D } { E } \left( \beta _ { U } - \beta _ { D } \right)$ 
D) $\beta _ { E } = \beta U + \frac { D } { E } \beta U$ 
A) $\beta _ { U } = \frac { E } { E + D } \beta _ { E } + \frac { D } { E + D } \beta _ { D }$ 
B) $\beta U = \beta _ { E ^ { + } } \frac { D } { E } \left( \beta U - \beta _ { D } \right)$ 
C) $\beta _ { E } = \beta U + \frac { D } { E } \left( \beta _ { U } - \beta _ { D } \right)$ 
D) $\beta _ { E } = \beta U + \frac { D } { E } \beta U$

Question 15

The presence of a large amount of debt can encourage shareholders to take excessive risk becaus?

Accepted Answer

A)  debt holders are risk seeking. 
B)  firm value increases with risk taking. 
C)  equity holders are risk seeking by nature. 
D)  the costs of failure are borne largely by debt holders. 
A)  debt holders are risk seeking. 
B)  firm value increases with risk taking. 
C)  equity holders are risk seeking by nature. 
D)  the costs of failure are borne largely by debt holders.

Question 16

The U in the equation above represent?

Accepted Answer

A)  the value of the firm's unlevered equity. 
B)  the value of the firm's debt. 
C)  the value of the firm's equity. 
D)  the market value of the firm's assets. 
A)  the value of the firm's unlevered equity. 
B)  the value of the firm's debt. 
C)  the value of the firm's equity. 
D)  the market value of the firm's assets.

Question 17

Agency costs arise whe?

Accepted Answer

A)  conflicts of interest exist between stakeholders. 
B)  input costs are higher than interest costs. 
C)  interest costs exceed dividend payments. 
D)  there are high labour costs. 
A)  conflicts of interest exist between stakeholders. 
B)  input costs are higher than interest costs. 
C)  interest costs exceed dividend payments. 
D)  there are high labour costs.

Question 18

Equity-debt holder conflicts are more likely to arise if the risk of financial distress is high?

Accepted Answer

A) True 
 B)False

Question 19

Financial managers prefer to choose the same debt level no matter which industry they operate in?

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is FALSE?

Accepted Answer

A)  We can calculate the cost of capital of the firm's assets by computing the weighted average of the firm's equity and debt cost of capital, which we refer to as the firm's weighted average
Cost of capital. 
B)  If we can identify a comparison firm whose assets have the same risk as the project being evaluated, and if the comparison firm is levered, then we can use its equity cost of capital as the cost of capital for the project. 
C)  When evaluating any potential investment project, we must use a discount rate that is appropriate given the risk of the project's free cash flow. 
D)  The portfolio of a firm's equity and debt replicates the returns we would earn if the firm were unlevered. 
A)  We can calculate the cost of capital of the firm's assets by computing the weighted average of the firm's equity and debt cost of capital, which we refer to as the firm's weighted average
Cost of capital. 
B)  If we can identify a comparison firm whose assets have the same risk as the project being evaluated, and if the comparison firm is levered, then we can use its equity cost of capital as the cost of capital for the project. 
C)  When evaluating any potential investment project, we must use a discount rate that is appropriate given the risk of the project's free cash flow. 
D)  The portfolio of a firm's equity and debt replicates the returns we would earn if the firm were unlevered.

A firm requires an investment of $20,000 and borrows $10,000 at 8%. If the return on equity is 20% and the tax rate is 30%, what is the firm's WACC?

Leverage can a firm's expected earnings per share, but does not necessarily increase the share price.

Aside from the direct costs of bankruptcy, a firm may also incur other indirect costs such a?

A firm'?

Which of the following statements is FALSE?

The relative proportions of debt, equity, and other securities that a firm has outstanding constitute its

A firm has a market value of assets of $50,000. It borrows $10,000 at 3%. If the unlevered cost of equity is 15%, what is the firm's cost of equity capital?

Managers should conside?

Which of the following do firms consider in the choice of securities issued?

What are the issues in determining the optimal leverage for a firm?

What role do industries play in the capital structure choice for a firm?

What are indirect costs of financial distress?

Suppose a project financed via an issue of debt requires six annual interest payments of $20 million each year. If the tax rate is 30% and the cost of debt is 8%, what is the value of the interest rate tax shield?

Which of the following equations would NOT be appropriate to use in a firm with risky debt?

The presence of a large amount of debt can encourage shareholders to take excessive risk becaus?

The U in the equation above represent?

Agency costs arise whe?

Equity-debt holder conflicts are more likely to arise if the risk of financial distress is high?

Financial managers prefer to choose the same debt level no matter which industry they operate in?

Which of the following statements is FALSE?

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

A firm requires an investment of $20,000 and borrows $10,000 at 8%. If the return on equity is 20% and the tax rate is 30%, what is the firm's WACC?

Leverage can a firm's expected earnings per share, but does not necessarily increase the share price.

Aside from the direct costs of bankruptcy, a firm may also incur other indirect costs such a?

A firm'?

Which of the following statements is FALSE?

The relative proportions of debt, equity, and other securities that a firm has outstanding constitute its

A firm has a market value of assets of $50,000. It borrows $10,000 at 3%. If the unlevered cost of equity is 15%, what is the firm's cost of equity capital?

Managers should conside?

Which of the following do firms consider in the choice of securities issued?

What are the issues in determining the optimal leverage for a firm?

What role do industries play in the capital structure choice for a firm?

What are indirect costs of financial distress?

Suppose a project financed via an issue of debt requires six annual interest payments of $20 million each year. If the tax rate is 30% and the cost of debt is 8%, what is the value of the interest rate tax shield?

Which of the following equations would NOT be appropriate to use in a firm with risky debt?

The presence of a large amount of debt can encourage shareholders to take excessive risk becaus?

The U in the equation above represent?

Agency costs arise whe?

Equity-debt holder conflicts are more likely to arise if the risk of financial distress is high?

Financial managers prefer to choose the same debt level no matter which industry they operate in?

Which of the following statements is FALSE?

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