Question 1

________ is the point at which the equity value of the firm is zero.

Accepted Answer

A) The optimal capital structure 
B) Bankruptcy 
C) The optimal tax structure 
D) None of the above 
A) The optimal capital structure 
B) Bankruptcy 
C) The optimal tax structure 
D) None of the above

Question 2

Graphic Design Inc.has a project that costs $150,000.It has a 40% chance of a $200,000 payoff and a 60% chance of a $100,000 payoff.What is the expected payoff and the expected profit or loss from the new project?

Accepted Answer

A) The expected payoff is $160,000 and the expected profit is $10,000. 
B) The expected payoff is $10,000 and the expected profit is $10,000. 
C) The expected payoff is $140,000 and the expected loss is $10,000. 
D) The expected payoff is $150,000 and the expected loss is $0. 
A) The expected payoff is $160,000 and the expected profit is $10,000. 
B) The expected payoff is $10,000 and the expected profit is $10,000. 
C) The expected payoff is $140,000 and the expected loss is $10,000. 
D) The expected payoff is $150,000 and the expected loss is $0.

Question 3

________ capital structure refers to a combination of debt and equity that maximizes the value of the firm.

Accepted Answer

A) An optimal 
B) An irrelevant 
C) A perfect 
D) A minimal 
A) An optimal 
B) An irrelevant 
C) A perfect 
D) A minimal

Question 4

The more ________ used,the greater the leverage a company employs on behalf of its owners.

Accepted Answer

A) debt 
B) equity 
C) debt and equity 
D) All of these 
A) debt 
B) equity 
C) debt and equity 
D) All of these

Question 5

When bankruptcy is added to the M&M world of capital structure,which of the following statements is true as more debt is added to the financing mix of the company?

Accepted Answer

A) The interest tax shield is a benefit to equity holders,although they bear increasing risk. 
B) The advantage of the tax shield starts to be offset by financial distress costs. 
C) The WACC of the company starts to increase past a certain level of debt. 
D) All of the above 
A) The interest tax shield is a benefit to equity holders,although they bear increasing risk. 
B) The advantage of the tax shield starts to be offset by financial distress costs. 
C) The WACC of the company starts to increase past a certain level of debt. 
D) All of the above

Question 6

Above the break-even EBIT,there is no benefit in debt financing.

Accepted Answer

A) True 
 B)False

Question 7

The initial decision of what products and services to produce has a much ________ on the profitability of the firm when compared to the ________.

Accepted Answer

A) smaller impact;financing decision 
B) larger impact;dividend decision 
C) larger impact;investment decision 
D) larger impact;financing decision 
A) smaller impact;financing decision 
B) larger impact;dividend decision 
C) larger impact;investment decision 
D) larger impact;financing decision

Question 8

Modigliani and Miller followed up their initial work with a new model that incorporated a world with corporate taxes.Which of the statements below results from this model?

Accepted Answer

A) A new Proposition I with taxes and it states: All debt financing is optimal. 
B) A new Proposition II with taxes and it states: The WACC of the firm falls as more debt is added. 
C) The more debt sold,the greater the tax shield and the smaller the government's share of the firm. 
D) All of these 
A) A new Proposition I with taxes and it states: All debt financing is optimal. 
B) A new Proposition II with taxes and it states: The WACC of the firm falls as more debt is added. 
C) The more debt sold,the greater the tax shield and the smaller the government's share of the firm. 
D) All of these

Question 9

According to the Pecking Order Hypothesis,selling equity is the first choice for firms that require outside financing.

Accepted Answer

A) True 
 B)False

Question 10

The return to the investor is the ________.

Accepted Answer

A) reward to the borrower 
B) cost to the borrower 
C) cost to the manager 
D) internal rate of return 
A) reward to the borrower 
B) cost to the borrower 
C) cost to the manager 
D) internal rate of return

Question 11

In basic terms,a business must earn a return on capital that exceeds the cost of capital.

Accepted Answer

A) True 
 B)False

Question 12

The Herald Tribune Inc.has a project that costs $400,000.It has a 30% chance of a $1,000,000 payoff and a 70% chance of a $200,000 payoff.What is the expected payoff and the expected profit or loss from the new project?

Accepted Answer

A) The expected payoff is $1,000,000,and the expected loss is $200,000. 
B) The expected payoff is $440,000,and the expected profit is $10,000. 
C) The expected payoff is $400,000,and the expected loss is $40,000. 
D) The expected payoff is $440,000,and the expected profit is $40,000. 
A) The expected payoff is $1,000,000,and the expected loss is $200,000. 
B) The expected payoff is $440,000,and the expected profit is $10,000. 
C) The expected payoff is $400,000,and the expected loss is $40,000. 
D) The expected payoff is $440,000,and the expected profit is $40,000.

Question 13

With the background ideas of using the cheapest source first and the impact of asymmetric information,what does the Pecking Order Hypothesis predict?

Accepted Answer

The Pecking Order Hypothesis predicts:
(

Question 14

The decision on capital structure seems to be related to the expected earnings of the company: ________.

Accepted Answer

A) the less the earnings,the more debt we should sell 
B) the more the earnings,the more debt we should sell 
C) the more the earnings,the less debt we should sell 
D) None of these 
A) the less the earnings,the more debt we should sell 
B) the more the earnings,the more debt we should sell 
C) the more the earnings,the less debt we should sell 
D) None of these

Question 15

Information is asymmetric when one party in a transaction has a different set of ________ from the other party in the transaction.

Accepted Answer

A) asymmetries 
B) information 
C) hypotheses 
D) earnings 
A) asymmetries 
B) information 
C) hypotheses 
D) earnings

Question 16

________ means that managers or owners of a company know more about the future performance of the company than potential outside lenders.

Accepted Answer

A) Symmetric information 
B) External financing 
C) Asymmetric information 
D) Two-sided information 
A) Symmetric information 
B) External financing 
C) Asymmetric information 
D) Two-sided information

Question 17

Which of the statements below is TRUE?

Accepted Answer

A) Debt capacity refers to the ability to add equity financing to the current borrowing of the firm and still be able to make interest and principal repayments on time. 
B) The asymmetric information foundation for the Pecking Order Hypothesis (POH)is that managers know less about their companies than the outside world. 
C) There are three implications of the POH.One of these is that profitable companies will borrow less (because they have more internal funds available)and may have lower debt-equity ratios because they have more debt capacity. 
D) There are three implications of the POH.One of these is that more profitable companies will need more external funding and will first seek debt financing in an asymmetric world,avoiding the equity market. 
A) Debt capacity refers to the ability to add equity financing to the current borrowing of the firm and still be able to make interest and principal repayments on time. 
B) The asymmetric information foundation for the Pecking Order Hypothesis (POH)is that managers know less about their companies than the outside world. 
C) There are three implications of the POH.One of these is that profitable companies will borrow less (because they have more internal funds available)and may have lower debt-equity ratios because they have more debt capacity. 
D) There are three implications of the POH.One of these is that more profitable companies will need more external funding and will first seek debt financing in an asymmetric world,avoiding the equity market.

Question 18

The Pecking Order Hypothesis suggests that less profitable companies will need more external funding and will first seek debt financing in an asymmetric world,avoiding the equity market.

Accepted Answer

A) True 
 B)False

Question 19

A large public firm cannot issue which of the following types of securities?

Accepted Answer

A) Common stock 
B) T-Bills 
C) Preferred stock 
D) Bonds 
A) Common stock 
B) T-Bills 
C) Preferred stock 
D) Bonds

Question 20

All markets are open to all borrowers.

Accepted Answer

A) True 
 B)False

________ is the point at which the equity value of the firm is zero.

Graphic Design Inc.has a project that costs $150,000.It has a 40% chance of a $200,000 payoff and a 60% chance of a $100,000 payoff.What is the expected payoff and the expected profit or loss from the new project?

________ capital structure refers to a combination of debt and equity that maximizes the value of the firm.

The more ________ used,the greater the leverage a company employs on behalf of its owners.

When bankruptcy is added to the M&M world of capital structure,which of the following statements is true as more debt is added to the financing mix of the company?

Above the break-even EBIT,there is no benefit in debt financing.

The initial decision of what products and services to produce has a much on the profitability of the firm when compared to the .

Modigliani and Miller followed up their initial work with a new model that incorporated a world with corporate taxes.Which of the statements below results from this model?

According to the Pecking Order Hypothesis,selling equity is the first choice for firms that require outside financing.

The return to the investor is the ________.

In basic terms,a business must earn a return on capital that exceeds the cost of capital.

The Herald Tribune Inc.has a project that costs $400,000.It has a 30% chance of a $1,000,000 payoff and a 70% chance of a $200,000 payoff.What is the expected payoff and the expected profit or loss from the new project?

With the background ideas of using the cheapest source first and the impact of asymmetric information,what does the Pecking Order Hypothesis predict?

The decision on capital structure seems to be related to the expected earnings of the company: ________.

Information is asymmetric when one party in a transaction has a different set of ________ from the other party in the transaction.

________ means that managers or owners of a company know more about the future performance of the company than potential outside lenders.

Which of the statements below is TRUE?

The Pecking Order Hypothesis suggests that less profitable companies will need more external funding and will first seek debt financing in an asymmetric world,avoiding the equity market.

A large public firm cannot issue which of the following types of securities?

All markets are open to all borrowers.

Financial Management

Financial Statements

The Time Value of Money Part 1

The Time Value of Money Part 2

Interest Rates

Bonds and Bond Valuation

Stocks and Stock Valuation

Risk and Return

Capital Budgeting Decision Models

Cash Flow Estimation

The Cost of Capital

Forecasting and Short-Term Financial Planning

Working Capital Management

Financial Ratios and Firm Performance

Raising Capital

Dividends,dividend Policy,and Stock Splits

International Financial Management

Filters

Exam 16: Capital Structure

________ is the point at which the equity value of the firm is zero.

Graphic Design Inc.has a project that costs $150,000.It has a 40% chance of a $200,000 payoff and a 60% chance of a $100,000 payoff.What is the expected payoff and the expected profit or loss from the new project?

________ capital structure refers to a combination of debt and equity that maximizes the value of the firm.

The more ________ used,the greater the leverage a company employs on behalf of its owners.

When bankruptcy is added to the M&M world of capital structure,which of the following statements is true as more debt is added to the financing mix of the company?

Above the break-even EBIT,there is no benefit in debt financing.

The initial decision of what products and services to produce has a much ________ on the profitability of the firm when compared to the ________.

Modigliani and Miller followed up their initial work with a new model that incorporated a world with corporate taxes.Which of the statements below results from this model?

According to the Pecking Order Hypothesis,selling equity is the first choice for firms that require outside financing.

The return to the investor is the ________.

In basic terms,a business must earn a return on capital that exceeds the cost of capital.

The Herald Tribune Inc.has a project that costs $400,000.It has a 30% chance of a $1,000,000 payoff and a 70% chance of a $200,000 payoff.What is the expected payoff and the expected profit or loss from the new project?

With the background ideas of using the cheapest source first and the impact of asymmetric information,what does the Pecking Order Hypothesis predict?

The decision on capital structure seems to be related to the expected earnings of the company: ________.

Information is asymmetric when one party in a transaction has a different set of ________ from the other party in the transaction.

________ means that managers or owners of a company know more about the future performance of the company than potential outside lenders.

Which of the statements below is TRUE?

The Pecking Order Hypothesis suggests that less profitable companies will need more external funding and will first seek debt financing in an asymmetric world,avoiding the equity market.

A large public firm cannot issue which of the following types of securities?

All markets are open to all borrowers.

Financial Management

Financial Statements

The Time Value of Money Part 1

The Time Value of Money Part 2

Interest Rates

Bonds and Bond Valuation

Stocks and Stock Valuation

Risk and Return

Capital Budgeting Decision Models

Cash Flow Estimation

The Cost of Capital

Forecasting and Short-Term Financial Planning

Working Capital Management

Financial Ratios and Firm Performance

Raising Capital

Dividends,dividend Policy,and Stock Splits

International Financial Management

Filters

The initial decision of what products and services to produce has a much on the profitability of the firm when compared to the .