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

When graphing firm value against debt levels,the debt level that maximizes the value of the firm is the level where:

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

The MM theory with taxes implies that firms should issue maximum debt.In practice,this is not true because:

Conflicts of interest between stockholders and bondholders are known as:

Establishing a capital structure for a firm is not simple.Although financial theory guides the process,there is no simple formula.List and explain four main items that one should consider in determining the capital structure.

In general,the capital structures used by U.S.firms:

Covenants restricting the use of leasing and additional borrowings primarily protect:

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 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?

The value of a firm is maximized when the:

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

The possibility of bankruptcy has a negative effect on the value of the firm because:

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

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.

Growth opportunities _______ the _____ of debt financing.

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

One of the indirect costs of bankruptcy is the incentive toward underinvestment.Following this strategy may result in:

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

In a world with taxes and financial distress,when a firm is operating with the optimal capital structure: I.the debt-equity ratio will also 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 is equal to the increased bankruptcy costs of that debt.

When firms issue more debt,the tax shield on debt ____,the agency costs on debt (i.e.,costs of financial distress)____,and the agency costs on equity ____.

The Do-All-Right Marketing Research firm has promised payments to its bondholders that total $100.The company believes that there is an 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%.