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

Kat owns and manages a small all-equity firm.If she works 40 hours a week,the firm's annual EBIT will be $38,000.If she increases her hours to 45 a week,EBIT will increase to $43,000.The firm has a current value of $210,000.Kat wants to expand the business and needs $76,000 to do so.The firm can borrow the needed funds at an interest rate of 6.7 percent,or it can issue equity.Ignore taxes.Kat will prefer

Indirect bankruptcy costs

The free cash flow hypothesis supports

The optimal debt-equity ratio tends to

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?

A firm is technically insolvent when

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

Which one of the following claims on a firm would be paid first in a bankruptcy liquidation if the court adheres to the absolute priority rule?

Dairy Isle has a value of $59,000 in a good economy and $48,000 in a recession.The firm has $50,000 of debt.The probability of a recession is 32 percent.The firm is considering a project that would change the firm values to $63,000 in a good economy and $46,000 in a recession.Which one of these statements correctly describes the effects of this project?

Which one of the following statements concerning bankruptcy is correct?

The pecking order theory states that when external funds are required,a firm should

As an attempt to avoid bankruptcy,a firm may

The explicit and implicit costs associated with corporate default are referred to as the ________ costs of a firm.

The optimal capital structure of a firm

Which one of these statements is correct?

Cool Refreshments has bonds outstanding with a face value of $211,000 that are selling at par.It also has 14,000 shares of stock outstanding that are selling for $16.20 a share.The all-equity value of the firm is $408,000.The tax rate is 35 percent.What is the value of the financial distress costs? Assume there are no other claims on the firm.