Question 1

A firm's use of more debt financing creates more risk to owners and thus increases the cost of equity.

Accepted Answer

A) True 
 B)False  True

Question 2

Which of the following is most likely to cause a firm to use more financial leverage?

Accepted Answer

A) the current owners concern for maintaining control of a healthy firm 
B) concern for the firm's Moodys and S & P bond ratings 
C) concern for maintaining excess borrowing capacity 
D) management's concern for their own risk 
A) the current owners concern for maintaining control of a healthy firm 
B) concern for the firm's Moodys and S & P bond ratings 
C) concern for maintaining excess borrowing capacity 
D) management's concern for their own risk A

Question 3

The desire to maintain high bond ratings will tend to increase the use of debt financing in a firm's capital structure.

Accepted Answer

A) True 
 B)False  False

Question 4

An investment banking firm has estimated the following after-tax cost of debt and cost of equity for Odarti's Finest Vegas Resorts.  
What is the cost of capital at Odarti's optimal capital structure given the above information?

Accepted Answer

A) 11.70% 
B) 11.54% 
C) 11.75% 
D) 11.65% 
A) 11.70% 
B) 11.54% 
C) 11.75% 
D) 11.65%

Question 5

Financial risk is the risk arising from the use of fixed cost sources of financing.

Accepted Answer

A) True 
 B)False

Question 6

What is financial risk?

Accepted Answer

A) the risk arising from a firms over reliance on short-term sources of financing 
B) the ordinary business risk arising from a firm's basic operations 
C) the risk arising from a firm's use of variable cost sources of financing 
D) the risk arising from a firm's use of fixed cost sources of financing 
A) the risk arising from a firms over reliance on short-term sources of financing 
B) the ordinary business risk arising from a firm's basic operations 
C) the risk arising from a firm's use of variable cost sources of financing 
D) the risk arising from a firm's use of fixed cost sources of financing

Question 7

The many factors influencing business risk can be placed in one of two categories. What are these two categories?

Accepted Answer

A) factors affecting sales revenue and those affecting assets 
B) factors affecting assets and those effecting costs 
C) factors affecting operating costs and those affecting financial costs 
D) factors affecting sales revenue and those affecting costs 
A) factors affecting sales revenue and those affecting assets 
B) factors affecting assets and those effecting costs 
C) factors affecting operating costs and those affecting financial costs 
D) factors affecting sales revenue and those affecting costs

Question 8

As a firm increases its use of debt financing, what is the impact upon the cost of equity?

Accepted Answer

A) The cost of equity decreases. 
B) The cost of equity remains the same. 
C) The cost of equity increases. 
D) None of the above. 
A) The cost of equity decreases. 
B) The cost of equity remains the same. 
C) The cost of equity increases. 
D) None of the above.

Question 9

Which of the following is true at a firm's optimal capital structure?

Accepted Answer

A) The firm's cost of capital is minimized. 
B) The firm is financed 100% with equity. 
C) The firm's cost of equity is minimized. 
D) The firm's cost of debt is minimized. 
A) The firm's cost of capital is minimized. 
B) The firm is financed 100% with equity. 
C) The firm's cost of equity is minimized. 
D) The firm's cost of debt is minimized.

Question 10

Financial risk is the basic risk inherent in the operations of a firm. It can be viewed as the volatility of a firm's EBIT.

Accepted Answer

A) True 
 B)False

Question 11

What is a firm's capital structure?

Accepted Answer

A) a firm's proportion of short-term financing provided by accounts payable, notes payable and other short-term sources 
B) a firm's composition of current assets broken up into cash, accounts receivable, and inventory 
C) a firm's proportion of long-term financing provided by debt, preferred stock, and common equity 
D) a firm's composition of debt broken up into short-term debt and long-term debt 
A) a firm's proportion of short-term financing provided by accounts payable, notes payable and other short-term sources 
B) a firm's composition of current assets broken up into cash, accounts receivable, and inventory 
C) a firm's proportion of long-term financing provided by debt, preferred stock, and common equity 
D) a firm's composition of debt broken up into short-term debt and long-term debt

Question 12

How does high business risk affect firm risk?

Accepted Answer

A) Higher business risk increases the volatility of capital structure. 
B) Higher business risk increases the volatility of EBIT. 
C) Higher business risk increases the volatility of financial costs. 
D) Higher business risk increases the volatility of the firm's asset structure. 
A) Higher business risk increases the volatility of capital structure. 
B) Higher business risk increases the volatility of EBIT. 
C) Higher business risk increases the volatility of financial costs. 
D) Higher business risk increases the volatility of the firm's asset structure.

Question 13

Increasing financial leverage decreases the volatility of owners' returns.

Accepted Answer

A) True 
 B)False

Question 14

An optimal capital structure minimizes a firm's cost of capital.

Accepted Answer

A) True 
 B)False

Question 15

Takeoka's Sushi To Go has estimated the following cost of debt before-tax)and cost of equity.  
What is the cost of capital at Takeoka's optimal capital structure given the above information and a 40% effective tax rate?

Accepted Answer

A) 10.78% 
B) 11.02% 
C) 11.13% 
D) 11.45% 
A) 10.78% 
B) 11.02% 
C) 11.13% 
D) 11.45%

Question 16

Bankruptcy costs are one type of financial distress cost.

Accepted Answer

A) True 
 B)False

Question 17

Fixed cost sources of financing include both debt and common stock.

Accepted Answer

A) True 
 B)False

Question 18

Luther's Famous Barbeque has estimated the following cost of debt before-tax)and cost of equity.  
What is the cost of capital at Luther's optimal capital structure given the above information and a 40% effective tax rate?

Accepted Answer

A) 8.71% 
B) 8.89% 
C) 9.03% 
D) 9.37% 
A) 8.71% 
B) 8.89% 
C) 9.03% 
D) 9.37%

Question 19

Which of the following is most likely to cause a firm to use less financial leverage?

Accepted Answer

A) currently low profits, but a large need for new funds 
B) concern for the firm's Moodys and S & P bond ratings 
C) low business risk 
D) avoidance of a corporate takeover 
A) currently low profits, but a large need for new funds 
B) concern for the firm's Moodys and S & P bond ratings 
C) low business risk 
D) avoidance of a corporate takeover

Question 20

An investment banking firm has estimated the following after-tax cost of debt and cost of equity for Marquez Luxury Travel Tours.  
What is the cost of capital at Marquez' optimal capital structure given the above information?

Accepted Answer

A) 8.95% 
B) 8.40% 
C) 8.30% 
D) 8.15% 
A) 8.95% 
B) 8.40% 
C) 8.30% 
D) 8.15%

A firm's use of more debt financing creates more risk to owners and thus increases the cost of equity.

Which of the following is most likely to cause a firm to use more financial leverage?

The desire to maintain high bond ratings will tend to increase the use of debt financing in a firm's capital structure.

An investment banking firm has estimated the following after-tax cost of debt and cost of equity for Odarti's Finest Vegas Resorts. What is the cost of capital at Odarti's optimal capital structure given the above information?

Financial risk is the risk arising from the use of fixed cost sources of financing.

What is financial risk?

The many factors influencing business risk can be placed in one of two categories. What are these two categories?

As a firm increases its use of debt financing, what is the impact upon the cost of equity?

Which of the following is true at a firm's optimal capital structure?

Financial risk is the basic risk inherent in the operations of a firm. It can be viewed as the volatility of a firm's EBIT.

What is a firm's capital structure?

How does high business risk affect firm risk?

Increasing financial leverage decreases the volatility of owners' returns.

An optimal capital structure minimizes a firm's cost of capital.

Takeoka's Sushi To Go has estimated the following cost of debt before-tax)and cost of equity. What is the cost of capital at Takeoka's optimal capital structure given the above information and a 40% effective tax rate?

Bankruptcy costs are one type of financial distress cost.

Fixed cost sources of financing include both debt and common stock.

Luther's Famous Barbeque has estimated the following cost of debt before-tax)and cost of equity. What is the cost of capital at Luther's optimal capital structure given the above information and a 40% effective tax rate?

Which of the following is most likely to cause a firm to use less financial leverage?

An investment banking firm has estimated the following after-tax cost of debt and cost of equity for Marquez Luxury Travel Tours. What is the cost of capital at Marquez' optimal capital structure given the above information?

Introduction

Financial Markets and Financial Instruments

Review of Financial Statements and Selected Ratios

The Relationship Between Risk and Return

Time Value of Money

Fixed Income Securities: Bonds and Preferred Stock

Common Stock

Cost of Capital

Introduction to Capital Budgeting and Cash Flow Estimation

Capital Budgeting Decision Methods

An Introduction to Hotel Valuation

Filters

Exam 12: Capital Structure

A firm's use of more debt financing creates more risk to owners and thus increases the cost of equity.

Which of the following is most likely to cause a firm to use more financial leverage?

The desire to maintain high bond ratings will tend to increase the use of debt financing in a firm's capital structure.

An investment banking firm has estimated the following after-tax cost of debt and cost of equity for Odarti's Finest Vegas Resorts. What is the cost of capital at Odarti's optimal capital structure given the above information?

Financial risk is the risk arising from the use of fixed cost sources of financing.

What is financial risk?

The many factors influencing business risk can be placed in one of two categories. What are these two categories?

As a firm increases its use of debt financing, what is the impact upon the cost of equity?

Which of the following is true at a firm's optimal capital structure?

Financial risk is the basic risk inherent in the operations of a firm. It can be viewed as the volatility of a firm's EBIT.

What is a firm's capital structure?

How does high business risk affect firm risk?

Increasing financial leverage decreases the volatility of owners' returns.

An optimal capital structure minimizes a firm's cost of capital.

Takeoka's Sushi To Go has estimated the following cost of debt before-tax)and cost of equity. What is the cost of capital at Takeoka's optimal capital structure given the above information and a 40% effective tax rate?

Bankruptcy costs are one type of financial distress cost.

Fixed cost sources of financing include both debt and common stock.

Luther's Famous Barbeque has estimated the following cost of debt before-tax)and cost of equity. What is the cost of capital at Luther's optimal capital structure given the above information and a 40% effective tax rate?

Which of the following is most likely to cause a firm to use less financial leverage?

An investment banking firm has estimated the following after-tax cost of debt and cost of equity for Marquez Luxury Travel Tours. What is the cost of capital at Marquez' optimal capital structure given the above information?

Introduction

Financial Markets and Financial Instruments

Review of Financial Statements and Selected Ratios

The Relationship Between Risk and Return

Time Value of Money

Fixed Income Securities: Bonds and Preferred Stock

Common Stock

Cost of Capital

Introduction to Capital Budgeting and Cash Flow Estimation

Capital Budgeting Decision Methods

An Introduction to Hotel Valuation

Filters