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

Custer's has bonds outstanding with a face value of $162,000 that are selling at par.It also has 10,000 shares of stock outstanding that are selling for $32.30 a share.The all-equity value of the firm is $455,000.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.

Bart's Mart will have a value of $41,000 if the economy does well this next year and a value of $32,000 if the economy does poorly.The probability of a good economy is 65 percent.The firm owes its bondholders $12,000.What is the market value of the firm if it only operates for one more year?

Firms on the brink of bankruptcy often work with their creditors to avoid a bankruptcy filing.Identify three options that a firm's creditors can offer a distressed firm to help that firm avoid filing for bankruptcy protection.Explain why creditors may be willing to provide these options.

The value of a firm is maximized when the:

Cool Refreshments has bonds outstanding with a face value of $140,000 that are selling at par.It also has 15,000 shares of stock outstanding that are selling for $19.80 a share.The all-equity value of the firm is $395,000.The tax rate is 34 percent.What is the value of the financial distress costs? Assume there are no other claims on the firm.

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

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

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

The pecking order states how financing should be raised.In order to avoid asymmetric information problems and misinterpretation of whether management is sending a signal on security overvaluation the firm's first rule is to:

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 $68,000.If he increases his hours to 65 a week,EBIT will increase to $148,000.The firm has a current value of $680,000.Marcus wants to expand the business and needs $320,000 to do so.The firm can borrow the needed funds at an interest rate of 8 percent or it can issue equity.Ignore taxes.Marcus will prefer:

Which one of the following is true?

Which of these represent indirect costs of financial distress? I.Court fees paid to a bankruptcy court II.A firm's supplier requiring payment in cash rather than offering its normal credit terms III.Cost of a manager's time spent renegotiating the terms of a debt to avoid bankruptcy IV.Loss of a key employee concerned about job security and the future of the firm

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

Which one of these statements is correct?

In principle,when does a firm become bankrupt?

The protective covenants contained within a loan agreement:

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

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 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-to-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.