Exam 17: Capital Structure: Limits to the Use of Debt

The free cash flow hypothesis states:

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

The introduction of personal taxes may reveal a disadvantage to the use of debt if the:

The optimal capital structure:

The Do-All-Right Marketing Research firm has promised payments to its bondholders that total $100. The company believes that there is a 85% chance that the cash flow will be sufficient to meet these claims. However,there is a 15% chance that cash flows will fall short,in which case total earnings are expected to be $65. If the bonds sell in the market for $84,what is an estimate of the bankruptcy costs for Do-All-Right? Assume a cost of debt of 10%.

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 35% Personal tax rate on income from bonds: 25% Personal tax rate on income from stocks: 30%

Although the use of debt provides tax benefits to the firm,debt also puts pressure on the firm to:

The legal proceeding for liquidating or reorganizing a firm operating in default is called a:

Describe some of the sources of business risk and financial risk. Do financial decision makers have the ability to "trade off" one type of risk for the other?

Given realistic estimates of the probability and cost of bankruptcy,the future costs of a possible bankruptcy are borne by:

Indirect costs of financial distress:

Define and describe the direct and indirect costs of bankruptcy. Give three examples of each.

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 0%

Consider an economy in which there are three groups of investors and no others. There are no personal taxes on income from stocks. An investment is available that pays a tax-free 4%. The corporate tax rate is 50%. Total corporate income before earnings and taxes (EBIT) is $224 million forever. What is the maximum debt-to-equity ratio for the economy as a whole?

Holly Berry Incorporated debtholders are promised payments of $25 if the firm does well,but will receive only $20 if the firm does poorly. Bondholders are willing to pay $15. The promised return to the bondholders is approximately:

In Miller's model,when the quantity [(1 - Tc)(1 - Ts) = (1 - Tb)],then:

Issuing debt instead of new equity in a closely held firm more likely:

Wigdor Manufacturing is currently all equity financed,has an EBIT of $2 million,and is in the 34% tax bracket. Louis,the company's founder,is the lone shareholder. If the firm were to convert $4 million of equity into debt at a cost of 10%,what would be the total cash flow to Louis if he holds all the debt? Compare this to Louis' total cash flow if the firm remains unlevered.

Given the following information,leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 30% Personal tax rate on income from stocks: 30%

Studies have found that firms with high proportions of intangible assets are likely to use ____________ debt compared with firms with low proportions of intangible assets.