Exam 15: Capital Structure: Limits to the Use of Debt

Miller Tool plans on closing its doors after one more year.During its last year in business,the firm expects to generate a cash flow of $76,000 if the economy booms and $58,000 if it does not.The probability of a boom is 15 percent.The firm has debt of $62,500 that is due in 1 year.That debt has a market value of $58,300 today.Ignore taxes.The current promised return on debt is ________ percent,and the expected return on debt is ________ percent.

Issuing debt instead of new equity in a closely held firm more likely causes owner-managers to

The optimal capital structure has been achieved when the

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

The Window Store will have a value of $139,000 if the economy does well this coming year and a value of $121,000 if the economy does poorly.The probability of a good economy is 68 percent.The firm owes its bondholders $63,000.The firm will only operate for one more year.What is the value of this firm to its shareholders?

Which one of these describes a bankruptcy situation known as a "cram down"?

Which one of these statements is correct?

Which one of these statements most applies to a firm that is suffering from financial distress?

The value of a firm is maximized when the

For next year,the probability the economy will do well is 82 percent,and Importers Unlimited will have a firm value of $68,000.If the economy tanks,the firm's value will decline to $43,000.The firm owes its bondholders $50,000.What is the value of this firm to its shareholders if the firm will close after next year?

The protective covenants contained within a loan agreement

The pecking order theory identifies two rules.The first rule is to

The optimal capital structure of a firm

The complete termination of a firm as a going business concern is called a

Burger Queen has a value of $38,000 in a good economy and $24,000 in a recession.The firm has $25,000 of debt.The probability of a recession is 50 percent.The firm is considering a project that would change the firm values to $42,000 in a good economy and $22,000 in a recession.Will shareholders accept this project? Will bondholders like this project?

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