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

ATC has a value of $98,000 in a normal economy and $87,000 in a recession.The firm has $90,000 of debt.The probability of a recession is 18 percent.The firm is considering a project that would change the firm values to $105,000 in a good economy and $92,000 in a recession.If the firm accepts this project,the firm value will ________ and shareholder value will ________.

A firm that has a negative net worth is said to be

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?

Bart's Mart will have a value of $59,000 if the economy does well this next year and a value of $52,000 if the economy does poorly.The probability of a good economy is 72 percent.The firm owes its bondholders $12,000.What is the market value of the firm if it only operates for one more year?

Which one of these statements is a correct implication of the pecking order theory?

The value of a firm is maximized when the

Which of the following are common loan covenants? Assume each item applies only during the term of the loan. I.Limit on future borrowing II.Requirement that the borrower maintains a minimum stated level of net working capital III.Limit on any sales or switches of assets IV.Limit on the amount of dividends that can be paid

The optimal capital structure of a firm ________ the marketed claims and ________ the nonmarketed claims against the cash flows of the firm.

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

Which one of these represents an indirect cost of financial distress?

Which one of the following is true?

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

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

Conflicts of interest between stockholders and bondholders are known as

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

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 protective covenants contained within a loan agreement

Corporations in the U.S.tend to

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.

A valuable firm will tend to: