Exam 16: Capital Structure

Pierce Corp. is looking at two possible capital structures. Currently, the firm is an all-equity firm with $1.2 million dollars in assets and 200,000 shares outstanding. The market value of each stock is $6.00. The CEO of Pierce is thinking of leveraging the firm by selling $600,000 of debt financing. The cost of debt is 8% annually, and the current corporate tax rate for Pierce is 30%. What is the break-even EBIT for Pierce with these two possible capital structures?

(Essay)

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Question 21

Information is asymmetric when one party in a transaction has a different set of ________ from the other party in the transaction.

(Multiple Choice)

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Question 22

M&M Proposition I states that, in a world of no taxes and no bankruptcy, ________.

(Multiple Choice)

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Question 23

When earnings are less than the cost of debt, it follows that the more debt, the lower the percentage of earnings available for distribution to shareholders.

(True/False)

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Question 24

The indirect costs of bankruptcy can include which of the following?

(Multiple Choice)

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Question 25

Describe the Static Theory of Capital Structure.

(Essay)

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Question 26

________ financial world is one without taxes, bankruptcy, and other imperfections.

(Multiple Choice)

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Question 27

Refer to the scenario above. What would be the unleveraged and leveraged EPSs look like if EBIT were $2,400?

(Multiple Choice)

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Question 28

In general, the cost of funds for an individual or company will be directly related to the lender's view of the risk of repayment of the funds.

(True/False)

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Question 29

If earnings reflect a return greater than the cost of debt, then ________.

(Multiple Choice)

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Question 30

In basic terms, a business must earn a return on capital that exceeds the cost of capital.

(True/False)

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Question 31

Theoretically, the more the earnings, the more a firm should use debt for financing purposes.

(True/False)

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Question 32

Aaaction Graphics, Inc. has a project that costs $400,000. It has a 30% chance of paying off $1,000,000 and a 70% chance of paying off $200,000. What is the expected payoff and the expected profit or loss from the new project?

(Multiple Choice)

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Question 33

The optimal capital structure of a firm is that combination of debt and equity that provides the highest overall cost of capital, or the highest WACC.

(True/False)

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Question 34

Landry Corp. is looking at two possible capital structures. Currently, the firm is an all-equity firm with $1.2 million dollars in assets and 200,000 shares outstanding. The market value of each stock is $6.00. The CEO of Landry is thinking of leveraging the firm by selling $600,000 of debt financing and retiring 100,000 shares, leaving 100,000 outstanding. The cost of debt is 10% annually, and the current corporate tax rate for Landry is 30%. If the CEO believes that Landry's EBIT will be $120,000, should the CEO leverage the firm? Explain.

(Essay)

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Question 35

The Modigliani and Miller original proposition II states that the value of the firm depends on three things: the required rate of return on the firm's assets, the firm's cost of debt, and the firm's debt-to-equity ratio.

(True/False)

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Question 36

Summarize the Modigliani and Miller contribution to the debate on the optimal capital structure.

(Essay)

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Question 37

Buck Stops Here, Inc. has a project that costs $900,000. It has a 50% chance of paying off $2,000,000 and a 50% chance of paying off $0. What is the expected payoff and the expected profit or loss from the new project?

(Multiple Choice)

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Question 38

________ is the point at which the equity value of the firm is zero.

(Multiple Choice)

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Question 39

According to the Pecking Order Hypothesis, less profitable companies in an asymmetric world will need more ; they will first seek and will avoid .

(Multiple Choice)

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Question 40

Showing 21 - 40 of 114

Information is asymmetric when one party in a transaction has a different set of ________ from the other party in the transaction.

M&M Proposition I states that, in a world of no taxes and no bankruptcy, ________.

When earnings are less than the cost of debt, it follows that the more debt, the lower the percentage of earnings available for distribution to shareholders.

The indirect costs of bankruptcy can include which of the following?

Describe the Static Theory of Capital Structure.

________ financial world is one without taxes, bankruptcy, and other imperfections.

Refer to the scenario above. What would be the unleveraged and leveraged EPSs look like if EBIT were $2,400?

In general, the cost of funds for an individual or company will be directly related to the lender's view of the risk of repayment of the funds.

If earnings reflect a return greater than the cost of debt, then ________.

In basic terms, a business must earn a return on capital that exceeds the cost of capital.

Theoretically, the more the earnings, the more a firm should use debt for financing purposes.

Aaaction Graphics, Inc. has a project that costs $400,000. It has a 30% chance of paying off $1,000,000 and a 70% chance of paying off $200,000. What is the expected payoff and the expected profit or loss from the new project?

The optimal capital structure of a firm is that combination of debt and equity that provides the highest overall cost of capital, or the highest WACC.

The Modigliani and Miller original proposition II states that the value of the firm depends on three things: the required rate of return on the firm's assets, the firm's cost of debt, and the firm's debt-to-equity ratio.

Summarize the Modigliani and Miller contribution to the debate on the optimal capital structure.

Buck Stops Here, Inc. has a project that costs $900,000. It has a 50% chance of paying off $2,000,000 and a 50% chance of paying off $0. What is the expected payoff and the expected profit or loss from the new project?

________ is the point at which the equity value of the firm is zero.

According to the Pecking Order Hypothesis, less profitable companies in an asymmetric world will need more ; they will first seek and will avoid .

Financial Management

Financial Statements

The Time Value of Money Part 1

The Time Value of Money Part 2

Interest Rates

Bonds and Bond Valuation

Stocks and Stock Valuation

Risk and Return

Capital Budgeting Decision Models

Cash Flow Estimation

The Cost of Capital

Forecasting and Short-Term Financial Planning

Working Capital Management

Financial Ratios and Firm Performance

Raising Capital

Dividends, Dividend Policy, and Stock Splits

International Financial Management

Filters

Exam 16: Capital Structure

Information is asymmetric when one party in a transaction has a different set of ________ from the other party in the transaction.

M&M Proposition I states that, in a world of no taxes and no bankruptcy, ________.

When earnings are less than the cost of debt, it follows that the more debt, the lower the percentage of earnings available for distribution to shareholders.

The indirect costs of bankruptcy can include which of the following?

Describe the Static Theory of Capital Structure.

________ financial world is one without taxes, bankruptcy, and other imperfections.

Refer to the scenario above. What would be the unleveraged and leveraged EPSs look like if EBIT were $2,400?

In general, the cost of funds for an individual or company will be directly related to the lender's view of the risk of repayment of the funds.

If earnings reflect a return greater than the cost of debt, then ________.

In basic terms, a business must earn a return on capital that exceeds the cost of capital.

Theoretically, the more the earnings, the more a firm should use debt for financing purposes.

Aaaction Graphics, Inc. has a project that costs $400,000. It has a 30% chance of paying off $1,000,000 and a 70% chance of paying off $200,000. What is the expected payoff and the expected profit or loss from the new project?

The optimal capital structure of a firm is that combination of debt and equity that provides the highest overall cost of capital, or the highest WACC.

The Modigliani and Miller original proposition II states that the value of the firm depends on three things: the required rate of return on the firm's assets, the firm's cost of debt, and the firm's debt-to-equity ratio.

Summarize the Modigliani and Miller contribution to the debate on the optimal capital structure.

Buck Stops Here, Inc. has a project that costs $900,000. It has a 50% chance of paying off $2,000,000 and a 50% chance of paying off $0. What is the expected payoff and the expected profit or loss from the new project?

________ is the point at which the equity value of the firm is zero.

According to the Pecking Order Hypothesis, less profitable companies in an asymmetric world will need more ________; they will first seek ________ and will avoid ________.

Financial Management

Financial Statements

The Time Value of Money Part 1

The Time Value of Money Part 2

Interest Rates

Bonds and Bond Valuation

Stocks and Stock Valuation

Risk and Return

Capital Budgeting Decision Models

Cash Flow Estimation

The Cost of Capital

Forecasting and Short-Term Financial Planning

Working Capital Management

Financial Ratios and Firm Performance

Raising Capital

Dividends, Dividend Policy, and Stock Splits

International Financial Management

Filters

According to the Pecking Order Hypothesis, less profitable companies in an asymmetric world will need more ; they will first seek and will avoid .