Question 1

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. 
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.

Question 2

Is there an easily identiﬁable debt-equity ratio that will maximize the value of a ﬁrm? Why or why not?

Accepted Answer

In a world with taxes, transaction costs

Question 3

The optimal capital structure:

Accepted Answer

A) will be the same for all ﬁrms in the same industry. 
B) will remain constant over time unless the ﬁrm makes an acquisition. 
C) of a ﬁrm will vary over time as taxes and market conditions change. 
D) places more emphasis on the operations of a ﬁrm rather than the ﬁnancing of a ﬁrm. 
E) is unaffected by changes in the ﬁnancial markets. 
A) will be the same for all ﬁrms in the same industry. 
B) will remain constant over time unless the ﬁrm makes an acquisition. 
C) of a ﬁrm will vary over time as taxes and market conditions change. 
D) places more emphasis on the operations of a ﬁrm rather than the ﬁnancing of a ﬁrm. 
E) is unaffected by changes in the ﬁnancial markets.

Question 4

If a ﬁrm issues debt but writes protective and restrictive covenants into the loan contract, then the ﬁrm's debt may be issued at a _____ interest rate compared with otherwise similar debt.

Accepted Answer

A) signiﬁcantly higher 
B) slightly higher 
C) equal 
D) lower 
E) None of the above. 
A) signiﬁcantly higher 
B) slightly higher 
C) equal 
D) lower 
E) None of the above.

Question 5

The costs of avoiding a bankruptcy ﬁling by a ﬁnancially distressed ﬁrm are classiﬁed as _____ costs.

Accepted Answer

A) ﬂotation 
B) direct bankruptcy 
C) indirect bankruptcy 
D) ﬁnancial solvency 
E) capital structure 
A) ﬂotation 
B) direct bankruptcy 
C) indirect bankruptcy 
D) ﬁnancial solvency 
E) capital structure

Question 6

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. 
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.

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

Is there an easily identiﬁable debt-equity ratio that will maximize the value of a ﬁrm? Why or why not?

The optimal capital structure:

If a ﬁrm issues debt but writes protective and restrictive covenants into the loan contract, then the ﬁrm's debt may be issued at a _____ interest rate compared with otherwise similar debt.

The costs of avoiding a bankruptcy ﬁling by a ﬁnancially distressed ﬁrm are classiﬁed as _____ costs.

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

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis

Discounted Cash Flow Valuation

Bond, Equity and Firm Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

Factor Models and the Arbitrage Pricing Theory

Risk, Cost of Capital and Capital Budgeting

Efficient Capital Markets and Behavioural Finance

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Equity Financing

Debt Financing

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Short-Term Capital Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

Exam 16: Capital Structure: Limits to the Use of Debt

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

Is there an easily identiﬁable debt-equity ratio that will maximize the value of a ﬁrm? Why or why not?

The optimal capital structure:

If a ﬁrm issues debt but writes protective and restrictive covenants into the loan contract, then the ﬁrm's debt may be issued at a _____ interest rate compared with otherwise similar debt.

The costs of avoiding a bankruptcy ﬁling by a ﬁnancially distressed ﬁrm are classiﬁed as _____ costs.

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

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis

Discounted Cash Flow Valuation

Bond, Equity and Firm Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

Factor Models and the Arbitrage Pricing Theory

Risk, Cost of Capital and Capital Budgeting

Efficient Capital Markets and Behavioural Finance

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Equity Financing

Debt Financing

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Short-Term Capital Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters