Exam 13: Capital Structure Concepts

A firm accepts the risk of fixed-cost financing is to:

Which of the following statements is true regarding the relationship between the firm's cost of debt and its capital structure (as measured by the debt ratio)?

Protection for debt holders takes the form of protective covenants in the bond indenture. These covenants place restrictions on which of the following activities?

The less a firm's business risk, the ____ the amount of ____ that will be used in the optimal capital structure, holding constant all other relevant factors.

Generally the ____ a firm's business risk, the ____ the amount of financial leverage that will be used in the optimal capital structure.

Arbitrage transactions are:

The increased variability in earnings per share due to the firm's use of debt is a definition of ____.

Holding all other things equal, as the relative amount of debt in the capital structure of the firm increases, the cost of equity capital will

The mix of debt, preferred stock, and common equity that minimizes the weighted cost of capital to the firm is known as the

RoTek has a capital structure of $300,000 in equity and $300,000 in perpetual debt. The firm's cost of equity is 14 percent and its cost of debt is 9 percent. If the firm has an expected, perpetual net operating income of $120,000 and a marginal tax rate of 40 percent, what is the market value of RoTek? Assume all net income is paid out as dividends.

The greater the variability of costs, the greater the business risk of the firm. This is reflected in the:

The management of Graphicopy is trying to determine how much debt they should have in their capital structure. If they sell $500,000 in perpetual bonds with a 9 percent coupon, what would be the present value of the tax shield? Assume the marginal tax rate is 35%.

The optimal capital structure of a firm is a function of the ____.

What is the present value of the tax shield to a firm that has total assets of $80 million and a net worth of $55 million, if the average interest rate on perpetual debt is 8.5%, the average return on equity is 14%, and the marginal tax rate is 35%?

The process of simultaneously buying and selling the same or equivalent securities in different markets to take advantage of price differences and make a profit is called:

Seduak has estimated the costs of debt and equity capital for various proportions of debt in its capital structure: Based on these estimates, determine Seduak's optimal capital structure.

The optimal capital structure is determined by several factors including all of the following except:

The airline industry is extremely price competitive, as well as having huge fixed costs and very low variable costs. This is an example of:

In determining the capital structure for an international firm, the managerial objective is to

With financial leverage, a change in EBIT results in a change in: