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

Which of the following are common loan covenants? Assume each item applies only during the term of the loan. I.Limit on future borrowing II.Requirement that the borrower maintains a minimum stated level of net working capital III.Limit on any sales or switches of assets IV.Limit on the amount of dividends that can be paid

ATC has a value of $70,000 in a good economy and $55,000 in a recession.The firm has $60,000 of debt.The probability of a recession is 50 percent.The firm is considering a project that would change the firm values to $73,000 in a good economy and $50,000 in a recession.If the firm accepts this project,the firm value will ______ and shareholder value will ______.

Kat owns and manages a small all-equity firm.If she works 40 hours a week,the firm's annual EBIT will be $41,000.If she increases her hours to 45 a week,EBIT will increase to $48,000.The firm has a current value of $190,000.Kat wants to expand the business and needs $114,000 to do so.The firm can borrow the needed funds at an interest rate of 7.5 percent or it can issue equity.Ignore taxes.Kat will prefer:

A firm may file for Chapter 11 bankruptcy: I.in an attempt to gain a competitive advantage. II.using a prepack. III.while allowing the current management to continue running the firm. IV.even though it is not insolvent.

A valuable firm will tend to:

Which one of these actions by a firm is an example of milking the property? Assume the firm is in a period of financial distress.

Which of these represent a payment of a nonmarketed claim on a firm's cash flows? I.Payment of a customer's liability claim II.Principal repayment of a bond III.Federal corporate tax payment IV.Dividend payment

The optimal capital structure of a firm _____ the marketed claims and _____ the nonmarketed claims against the cash flows of the firm.

The optimal capital structure will tend to include more debt for firms with:

Conflicts of interest between stockholders and bondholders are known as:

Indirect bankruptcy costs:

Corporations in the U.S.tend to:

A firm that has a negative net worth is said to be:

Miller Tool plans on closing its doors after one more year.During its last year in business the firm expects to generate a cash flow of $89,000 if the economy booms and $61,000 if it does not.The probability of a boom is 30 percent.The firm has debt of $65,000 that is due in one year.That debt has a market value of $57,000 today.Ignore taxes.The current promised return on debt is ____ percent and the expected return on debt is ______ percent.

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?

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