Exam 15: Cap Structure

Which of the following statements best describes the optimal capital structure? The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company's ______________.

following information has been presented to you about the Gibson Corporation. The company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends (EPS = DPS) The consultant believes that if the company moves to a capital structure financed with 20% debt and 80% equity (based on market values) that the cost of equity will increase to 11% and that the pre-tax cost of debt will be 10% If the company makes this change, what would be the total market value (in millions) of the firm?

Financial risk refers to the extra risk stockholders bear as a result of using debt as compared with the risk they would bear if no debt were used.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?

Provided a firm does not use an extreme amount of debt, financial leverage typically affects both EPS and EBIT, while operating leverage only affects EBIT.

is possible that two firms could have identical financial and operating leverage, yet have different degrees of risk as measured by the variability of EPS.

world-famous discounter, Fernwood Booksellers, specializes in selling paperbacks for $7 each The variable cost per book is $5 At current annual sales of 200,000 books, the publisher is just breaking even It is estimated that if the authors' royalties are reduced, the variable cost per book will drop by $1 Assume authors' royalties are reduced and sales remain constant; how much more money can the publisher put into advertising (a fixed cost) and still break even?

the text indicates, a firm's financial risk has identifiable market risk and diversifiable risk components.

Miller and Modigliani had incorporated the costs of bankruptcy into their model, it is unlikely that they would have concluded that 100% debt financing is optimal.

all-equity firm with 200,000 shares outstanding, Antwerther Inc., has $2,000,000 of EBIT, which is expected to remain constant in the future The company pays out all of its earnings, so earnings per share (EPS) equal dividends per shares (DPS) Its tax rate is 40%. The company is considering issuing $5,000,000 of 10.0% bonds and using the proceeds to repurchase stock The risk-free rate is 6.5%, the market risk premium is 5.0%, and the beta is currently 0.90, but the CFO believes beta would rise to 1.10 if the recapitalization occurs. Assuming that the shares can be repurchased at the price that existed prior to the recapitalization, what would the price be following the recapitalization?

Which of the following statements is CORRECT?

a firm utilizes debt financing, an X% decline in earnings before interest and taxes (EBIT) will result in a decline in earnings per share that is larger than X.

graphical probability distribution of ROE for a firm that uses financial leverage would tend to be more peaked than the distribution if the firm used no leverage, other things held constant.

firm's capital structure does not affect its calculated free cash flows, because FCF reflects only operating cash flows.

Larsen Films's is analyzing its cost structureIts fixed operating costs are $470,000, its variable costs of $2.80 per unit produced, and its products sell for $4.00 per unit What is the company's breakeven point, i.e., at what unit sales volume would income equal costs?

debt financing is used, which of the following is CORRECT?

Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure?

Which of the following would increase the likelihood that a company would increase its debt ratio, other things held constant?