Exam 17: Capital Structure: Limits to the Use of Debt

If a firm issues debt and includes protective covenants in the indenture then the firm's debt will probably be issued at ________ similar debt without the covenants.

The optimal capital structure:

Which one of these parties holds a marketable claim on a firm's assets?

Which one of the following is not empirically correct?

Covenants restricting additional borrowings primarily protect the:

Which one of the following is a direct,rather than an indirect,cost of financial distress?

Issuing debt instead of new equity in a closely held firm is most apt to cause:

AZC Company is currently valued at $300 in a boom and $160 otherwise.The chance of a boom is 35 percent.What is the value of the firm to the shareholders if the firm owes $200 to its debtholders?

According to the pecking-order theory,a firm's leverage ratio is determined by:

A decrease in a firm's level of debt tends to imply:

The introduction of personal taxes may reveal a disadvantage to the use of corporate debt if the personal tax rate on:

Adept Inc.is currently valued at $145,700 in a boom and $75,200 in a recession.The chance of either economic state occurring is 50 percent.The firm owes $85,000 to its debt holders.What is the value of the firm to the shareholders in a recession?

The free cash flow hypothesis states that:

The optimal capital structure of a firm ________ the marketable claims and ________ the nonmarketable claims against the cash flows of the firm.

Which one of these lowers cash flows?

The All-Mine Corporation is deciding whether to invest in a new one-year project.The project would have to be financed by equity,the cost is $2,000,and the return will be a guaranteed $2,500 in one year.The discount rate for both bonds and stock is 15 percent and the tax rate is zero.The predicted cash flows excluding this new project are $4,500 in a good economy,$3,000 in an average economy,and $1,000 in a poor economy.Each economic outcome is equally likely to occur and the promised debt repayment is $3,000.Should the company take the project? What is the value of the firm and its debt and equity components before and after the project addition?

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

Many firms base their actual capital structure decisions on which two factors?

The Wiz Co.owes $60 to its bondholders for the payment of principal and interest.The company expects to have a cash flow of $136 if the economy continues as it is but that cash flow will decrease to $54 if the economy enters a recession.Should the company ever face the real possibility of bankruptcy,it will incur legal and other fees of $30.What amount will the bondholders be paid in the case of a recession?

Is there an easily quantifiable debt-equity ratio that will maximize the value of a firm? Why or why not?