Question 1

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

Accepted Answer

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

Question 2

In general,the capital structures of U.S.firms:

Accepted Answer

A) tend to overweight debt in relation to equity. 
B) employ less debt when the firm requires large amounts of tangible assets. 
C) are constant over time on a firm-by-firm basis. 
D) tend to be those that maximize the use of each firm's available tax shelters. 
E) vary significantly across industries. 
A) tend to overweight debt in relation to equity. 
B) employ less debt when the firm requires large amounts of tangible assets. 
C) are constant over time on a firm-by-firm basis. 
D) tend to be those that maximize the use of each firm's available tax shelters. 
E) vary significantly across industries.

Question 3

Which one of these actions by a firm is an example of milking the property? Assume the firm is in a period of financial distress.

Accepted Answer

A) Repaying a bond that matured 
B) Paying the semiannual bond interest 
C) Paying an extra dividend 
D) Cutting a regular dividend 
E) Paying a regular dividend 
A) Repaying a bond that matured 
B) Paying the semiannual bond interest 
C) Paying an extra dividend 
D) Cutting a regular dividend 
E) Paying a regular dividend

Question 4

The Sawmill expects to generate a cash flow of $59,000 next year if the economy booms and $46,000 if it does not.The probability of a boom is 20 percent.The firm has debt of $52,000 that is due in 1 year and has a current market value of $48,700.The firm plans to close after this coming year.The current promised pretax return on debt is ________ percent,and the expected pretax return on debt is ________ percent.

Accepted Answer

A) 6.78; 1.16 
B) 6.78; -3.08 
C) 5.49; 1.16 
D) 5.49; -2.67 
E) 6.27; -3.08 
A) 6.78; 1.16 
B) 6.78; -3.08 
C) 5.49; 1.16 
D) 5.49; -2.67 
E) 6.27; -3.08

Question 5

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

Accepted Answer

A) tender offer. 
B) bankruptcy. 
C) merger. 
D) takeover. 
E) proxy fight. 
A) tender offer. 
B) bankruptcy. 
C) merger. 
D) takeover. 
E) proxy fight.

Question 6

Which one of these statements is correct for a levered firm?

Accepted Answer

A) An increase in tax rates will decrease the value of the firm. 
B) An increase in financial distress costs increases the value of a firm. 
C) To obtain its maximum value,a firm should select an all-equity capital structure. 
D) The value of a firm is maximized when its cost of capital is also maximized. 
E) The optimal level of debt for a firm results in the value of that firm being maximized. 
A) An increase in tax rates will decrease the value of the firm. 
B) An increase in financial distress costs increases the value of a firm. 
C) To obtain its maximum value,a firm should select an all-equity capital structure. 
D) The value of a firm is maximized when its cost of capital is also maximized. 
E) The optimal level of debt for a firm results in the value of that firm being maximized.

Question 7

Marcus owns and manages OLK,which is an all-equity firm.If he works 40 hours a week,the firm's annual EBIT will be $96,000.If he increases his hours to 45 a week,EBIT will increase to $108,000.The firm has a current value of $926,000.Marcus needs $250,000 to fund a new project.The firm can borrow the needed funds at an interest rate of 6 percent,or it can issue equity.Ignore taxes.Marcus will prefer

Accepted Answer

A) debt with a 40-hour week as that option provides him with the highest cash flow. 
B) debt with a 45-hour week as his cash flow will be $11,000 greater than his next best option. 
C) equity with a 45-hour week as his cash flow will be $85,041. 
D) equity with a 40-hour week as that option provides him with the lowest cash flow. 
E) debt with a 45-hour week as his cash flow will be $7,959 higher than if he works 45 hours and shares his equity. 
A) debt with a 40-hour week as that option provides him with the highest cash flow. 
B) debt with a 45-hour week as his cash flow will be $11,000 greater than his next best option. 
C) equity with a 45-hour week as his cash flow will be $85,041. 
D) equity with a 40-hour week as that option provides him with the lowest cash flow. 
E) debt with a 45-hour week as his cash flow will be $7,959 higher than if he works 45 hours and shares his equity.

Question 8

In principle,a firm becomes bankrupt when

Accepted Answer

A) its equity value falls to zero. 
B) a lender refuses to lend any additional funds to the firm. 
C) its current ratio is less than one. 
D) it is one day late paying a payment to a creditor. 
E) its debt exceeds its equity. 
A) its equity value falls to zero. 
B) a lender refuses to lend any additional funds to the firm. 
C) its current ratio is less than one. 
D) it is one day late paying a payment to a creditor. 
E) its debt exceeds its equity.

Question 9

The optimal capital structure has been achieved when the

Accepted Answer

A) weight of equity is equal to the weight of debt. 
B) debt-equity ratio selected results in the lowest possible weighted average cost of capital. 
C) firm is totally financed with debt. 
D) debt-equity ratio is such that the cost of debt exceeds the cost of equity. 
E) cost of equity is maximized. 
A) weight of equity is equal to the weight of debt. 
B) debt-equity ratio selected results in the lowest possible weighted average cost of capital. 
C) firm is totally financed with debt. 
D) debt-equity ratio is such that the cost of debt exceeds the cost of equity. 
E) cost of equity is maximized.

Question 10

A legal attempt to financially restructure a failing firm so that it can continue operating as a going concern is called a

Accepted Answer

A) merger. 
B) reorganization. 
C) liquidation. 
D) repurchase program. 
E) divestiture. 
A) merger. 
B) reorganization. 
C) liquidation. 
D) repurchase program. 
E) divestiture.

Question 11

Custer's has bonds outstanding with a face value of $98,000 that are selling at par.It also has 12,000 shares of stock outstanding that are selling for $25.90 a share.The all-equity value of the firm is $398,000.The tax rate is 35 percent.By what amount has the value of the firm been decreased by the expected bankruptcy costs? Assume there are no other claims on the firm.

Accepted Answer

A) $21,300 
B) $18,900 
C) $23,500 
D) $0 
E) $20,750 
A) $21,300 
B) $18,900 
C) $23,500 
D) $0 
E) $20,750

Question 12

A firm may file for Chapter 11 bankruptcy
I.in an attempt to gain a competitive advantage.
II.using a prepack.
III.while allowing the current management to continue running the firm.
IV.even though it is not insolvent.

Accepted Answer

A) I and III only 
B) I,II,and IV only 
C) I and II only 
D) III and IV only 
E) I,II,III,and IV 
A) I and III only 
B) I,II,and IV only 
C) I and II only 
D) III and IV only 
E) I,II,III,and IV

Question 13

Which one of these best describes the relationship between bondholders and stockholders at a time when it appears the firm may be facing increased financial distress?

Accepted Answer

A) Stockholders have an incentive to underinvest in new projects to the detriment of bondholders. 
B) Both parties tend to work together for the common good of the firm. 
C) Both bondholders and stockholders will encourage the firm to take on new high risk projects. 
D) Bondholders will tend to lower their required rate of interest so the firm can afford additional financing until its financial status improves. 
E) Bondholders tend to milk the property at the expense of stockholders. 
A) Stockholders have an incentive to underinvest in new projects to the detriment of bondholders. 
B) Both parties tend to work together for the common good of the firm. 
C) Both bondholders and stockholders will encourage the firm to take on new high risk projects. 
D) Bondholders will tend to lower their required rate of interest so the firm can afford additional financing until its financial status improves. 
E) Bondholders tend to milk the property at the expense of stockholders.

Question 14

In a world with corporate taxes,MM theory implies that that all firms should

Accepted Answer

A) maintain a constant value. 
B) decrease in value as the leverage of the firm increases. 
C) choose an all-debt capital structure. 
D) select the capital structure that maximizes the firm's WACC. 
E) select the capital structure that equates the marginal cost of debt with the marginal benefits. 
A) maintain a constant value. 
B) decrease in value as the leverage of the firm increases. 
C) choose an all-debt capital structure. 
D) select the capital structure that maximizes the firm's WACC. 
E) select the capital structure that equates the marginal cost of debt with the marginal benefits.

Question 15

Which one of these relationships will exist if a firm is operating under its optimal capital structure?

Accepted Answer

A) The net present value of the firm will equal zero. 
B) The firm's cost of capital will equal the risk-free rate. 
C) The present value of the financial distress costs will equal the present value of the tax shield on debt. 
D) The value of the firm will equal the maximum value obtainable according to the MM theories. 
E) The firm will be financed with equal amounts of long-term debt and equity. 
A) The net present value of the firm will equal zero. 
B) The firm's cost of capital will equal the risk-free rate. 
C) The present value of the financial distress costs will equal the present value of the tax shield on debt. 
D) The value of the firm will equal the maximum value obtainable according to the MM theories. 
E) The firm will be financed with equal amounts of long-term debt and equity.

Question 16

Which one of the following statements is correct concerning a Chapter 7 bankruptcy?

Accepted Answer

A) A firm reorganizes its operations in an effort to return to being a viable concern. 
B) A trustee will assume control of the firm's assets until those assets can be liquidated. 
C) Chapter 7 bankruptcies are always involuntary on the part of the firm. 
D) The claims of creditors are paid prior to the bankruptcy administrative costs. 
E) The firm generally issues new shares of stock prior to coming out of bankruptcy. 
A) A firm reorganizes its operations in an effort to return to being a viable concern. 
B) A trustee will assume control of the firm's assets until those assets can be liquidated. 
C) Chapter 7 bankruptcies are always involuntary on the part of the firm. 
D) The claims of creditors are paid prior to the bankruptcy administrative costs. 
E) The firm generally issues new shares of stock prior to coming out of bankruptcy.

Question 17

The explicit costs,such as the legal expenses,associated with corporate default are classified as ________ costs.

Accepted Answer

A) unlevered 
B) beta conversion 
C) direct bankruptcy 
D) indirect bankruptcy 
E) flotation 
A) unlevered 
B) beta conversion 
C) direct bankruptcy 
D) indirect bankruptcy 
E) flotation

Question 18

Which of these will occur in a world with taxes and financial distress when a firm is operating at its optimal capital structure?
I.The debt-equity ratio will be optimal.
II.The weighted average cost of capital will be at its minimal point.
III.The required return on assets will be at its maximum point.
IV.The increased benefit from additional debt will equal the increased bankruptcy costs of that debt.

Accepted Answer

A) I and IV only 
B) II and III only 
C) I and II only 
D) II,III,and IV only 
E) I,II,and IV only 
A) I and IV only 
B) II and III only 
C) I and II only 
D) II,III,and IV only 
E) I,II,and IV only

Question 19

Which one of these is a payment of a nonmarketed claim on a firm's cash flows?

Accepted Answer

A) Dividend payment 
B) Principal repayment of a bond 
C) Repurchase of stock 
D) Payment of a customer's liability claim 
E) Payment of interest due on a bond 
A) Dividend payment 
B) Principal repayment of a bond 
C) Repurchase of stock 
D) Payment of a customer's liability claim 
E) Payment of interest due on a bond

Question 20

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

Accepted Answer

A) merger. 
B) repurchase program. 
C) liquidation. 
D) divestiture. 
E) reorganization. 
A) merger. 
B) repurchase program. 
C) liquidation. 
D) divestiture. 
E) reorganization.

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

In general,the capital structures of U.S.firms:

Which one of these actions by a firm is an example of milking the property? Assume the firm is in a period of financial distress.

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

Which one of these statements is correct for a levered firm?

In principle,a firm becomes bankrupt when

The optimal capital structure has been achieved when the

A legal attempt to financially restructure a failing firm so that it can continue operating as a going concern is called a

A firm may file for Chapter 11 bankruptcy I.in an attempt to gain a competitive advantage. II.using a prepack. III.while allowing the current management to continue running the firm. IV.even though it is not insolvent.

Which one of these best describes the relationship between bondholders and stockholders at a time when it appears the firm may be facing increased financial distress?

In a world with corporate taxes,MM theory implies that that all firms should

Which one of these relationships will exist if a firm is operating under its optimal capital structure?

Which one of the following statements is correct concerning a Chapter 7 bankruptcy?

The explicit costs,such as the legal expenses,associated with corporate default are classified as ________ costs.

Which one of these is a payment of a nonmarketed claim on a firm's cash flows?

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

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock 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

Return and Risk: The Capital Asset Pricing Model Capm

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Basic Concepts

Dividends and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

Mergers and Acquisitions Web Only

Filters

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

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

In general,the capital structures of U.S.firms:

Which one of these actions by a firm is an example of milking the property? Assume the firm is in a period of financial distress.

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

Which one of these statements is correct for a levered firm?

In principle,a firm becomes bankrupt when

The optimal capital structure has been achieved when the

A legal attempt to financially restructure a failing firm so that it can continue operating as a going concern is called a

A firm may file for Chapter 11 bankruptcy I.in an attempt to gain a competitive advantage. II.using a prepack. III.while allowing the current management to continue running the firm. IV.even though it is not insolvent.

Which one of these best describes the relationship between bondholders and stockholders at a time when it appears the firm may be facing increased financial distress?

In a world with corporate taxes,MM theory implies that that all firms should

Which one of these relationships will exist if a firm is operating under its optimal capital structure?

Which one of the following statements is correct concerning a Chapter 7 bankruptcy?

The explicit costs,such as the legal expenses,associated with corporate default are classified as ________ costs.

Which one of these is a payment of a nonmarketed claim on a firm's cash flows?

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

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock 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

Return and Risk: The Capital Asset Pricing Model Capm

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Basic Concepts

Dividends and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

Mergers and Acquisitions Web Only

Filters