Question 1

If earnings reflect a return greater than the cost of debt,then ________.

Accepted Answer

A) the more debt the company has sold,the worse off the shareholders are 
B) the less debt the company has sold,the better off the shareholders are 
C) the more debt the company has sold,the better off the shareholders are 
D) the more debt the company has bought,the better off the shareholders are 
A) the more debt the company has sold,the worse off the shareholders are 
B) the less debt the company has sold,the better off the shareholders are 
C) the more debt the company has sold,the better off the shareholders are 
D) the more debt the company has bought,the better off the shareholders are

Question 2

Capital structure refers to how the firm finances its operations and growth through a combination of ________.

Accepted Answer

A) equity types 
B) security types 
C) types of earnings 
D) types of debt 
A) equity types 
B) security types 
C) types of earnings 
D) types of debt

Question 3

Describe the Pecking Order Hypothesis.

Accepted Answer

Moving from one source of funding to ano

Question 4

A ________ is a separate entity and in that capacity can borrow from banks,bondholders,preferred stockholders,and common shareholders.

Accepted Answer

A) limited partnership 
B) sole proprietorship 
C) government organization 
D) public company 
A) limited partnership 
B) sole proprietorship 
C) government organization 
D) public company

Question 5

Which of the statements below is FALSE?

Accepted Answer

A) The "riskier" borrower will most likely have to pay a lower cost for funds. 
B) In the bond market,we see different rates as the different yields on bonds for different companies. 
C) In the equity market,we see different rates as the different required returns for companies due to their different betas. 
D) In general,the cost of funds for an individual or company will be directly related to the lender's view of the risk of repayment of the funds. 
A) The "riskier" borrower will most likely have to pay a lower cost for funds. 
B) In the bond market,we see different rates as the different yields on bonds for different companies. 
C) In the equity market,we see different rates as the different required returns for companies due to their different betas. 
D) In general,the cost of funds for an individual or company will be directly related to the lender's view of the risk of repayment of the funds.

Question 6

Pierce Corp.is looking at two possible capital structures.Currently,the firm is an all-equity firm with $1.2 million dollars in assets and 200,000 shares outstanding.The market value of each stock is $6.00.The CEO of Pierce is thinking of leveraging the firm by selling $600,000 of debt financing.The cost of debt is 8% annually,and the current corporate tax rate for Pierce is 30%.What is the break-even EBIT for Pierce with these two possible capital structures?

Accepted Answer

Set the EPS of the two capital structure

Question 7

Fuji Inc.is registered as a business in the film-making industry.It can borrow in the debt market at 9%.Its cost of equity with 50% debt is 14%.Its corporate tax rate is 40%.If the M&M world of taxes holds,what is the WACC for Fuji with 50% debt financing?

Accepted Answer

A) 8.75% 
B) 9.00% 
C) 9.15% 
D) 9.70% 
A) 8.75% 
B) 9.00% 
C) 9.15% 
D) 9.70%

Question 8

Donat Corp.is a small company looking at two possible capital structures.Currently,the firm is an all-equity firm with $600,000 in assets and 100,000 shares outstanding.The market value of each share is $6.00.The CEO of Donat is thinking of leveraging the firm by selling $300,000 of debt financing and retiring 50,000 shares,leaving 50,000 shares outstanding.The cost of debt is 5% annually,and the current corporate tax rate for Donat is 30%.The CEO believes that Donat will earn $50,000 per year before interest and taxes.Which of the statements below is TRUE?

Accepted Answer

A) All-equity EPS is $0.35. 
B) 50/50 debt-to-equity EPS is $0.49. 
C) Shareholders will be better off by $0.14 per share under a firm with $300,000 in debt financing versus a firm that is all-equity. 
D) Statements A,B,and C are all true. 
A) All-equity EPS is $0.35. 
B) 50/50 debt-to-equity EPS is $0.49. 
C) Shareholders will be better off by $0.14 per share under a firm with $300,000 in debt financing versus a firm that is all-equity. 
D) Statements A,B,and C are all true.

Question 9

A rising WACC ________ the values of the firm's future cash flows.

Accepted Answer

A) increases 
B) reduces 
C) keeps constant 
D) has no effect on 
A) increases 
B) reduces 
C) keeps constant 
D) has no effect on

Question 10

The contribution of M&M comes from the fact that there is a constant trade-off ratio.Which of the statements below describe this constant trade-off ratio?

Accepted Answer

A) When a firm adds more low cost debt,it automatically increases the cost of equity so that the overall cost of capital remains constant. 
B) When a firm adds more low cost debt,it automatically increases the cost of equity so that the overall cost of capital increases. 
C) When a firm adds more low cost debt,it automatically increases the cost of equity so that the overall cost of capital decreases. 
D) None of these 
A) When a firm adds more low cost debt,it automatically increases the cost of equity so that the overall cost of capital remains constant. 
B) When a firm adds more low cost debt,it automatically increases the cost of equity so that the overall cost of capital increases. 
C) When a firm adds more low cost debt,it automatically increases the cost of equity so that the overall cost of capital decreases. 
D) None of these

Question 11

Which of the statements below is FALSE?

Accepted Answer

A) When a company performs well,it can handle more debt and benefit the owners. 
B) Borrowing from debt lenders at one rate and investing the money in the business and making a higher rate is bad for the owners. 
C) Assume that the more debt the company has sold,the better off the shareholders are.This is the case where the earnings reflect a return greater than the cost of debt. 
D) Financial leverage is the degree to which a firm or individual utilizes borrowed money to make money. 
A) When a company performs well,it can handle more debt and benefit the owners. 
B) Borrowing from debt lenders at one rate and investing the money in the business and making a higher rate is bad for the owners. 
C) Assume that the more debt the company has sold,the better off the shareholders are.This is the case where the earnings reflect a return greater than the cost of debt. 
D) Financial leverage is the degree to which a firm or individual utilizes borrowed money to make money.

Question 12

Proposition II from M&M says that the cost of equity is a function of which of the items below?

Accepted Answer

A) The required return on assets (which is the same for firms with identical assets or investment choices) 
B) The cost of debt 
C) The debt-equity ratio of the firm 
D) All of these 
A) The required return on assets (which is the same for firms with identical assets or investment choices) 
B) The cost of debt 
C) The debt-equity ratio of the firm 
D) All of these

Question 13

When earnings are less than the cost of debt,it follows that the more debt,the lower the percentage of earnings available for distribution to shareholders.

Accepted Answer

A) True 
 B)False

Question 14

Which of the statements below is FALSE?

Accepted Answer

A) External lenders generally require the company to provide private information about the company,its plans,current operations,and past performance. 
B) Corporate financing problems are really not all that different from personal financing ones. 
C) If information is proprietary and the company feels that it could be helpful to a competitor if it was to become public knowledge through lending,then the company's logical choice is to use internal funds if they are sufficient for funding a new project. 
D) None of the above statements is false. 
A) External lenders generally require the company to provide private information about the company,its plans,current operations,and past performance. 
B) Corporate financing problems are really not all that different from personal financing ones. 
C) If information is proprietary and the company feels that it could be helpful to a competitor if it was to become public knowledge through lending,then the company's logical choice is to use internal funds if they are sufficient for funding a new project. 
D) None of the above statements is false.

Question 15

Which of the statements below is FALSE?

Accepted Answer

A) Two different individuals or companies could go to the same bank and request exactly the same amount of funding for their projects and yet could be required to pay different costs for their funds. 
B) It is important to remember that a public company is a separate entity and in that capacity can borrow from bondholders,preferred stockholders,and common shareholders,but not from banks. 
C) Lenders,regardless of their classification,all consider their funds as investments,for which they hope to make a positive return. 
D) The return to the investor is the cost to the seller. 
A) Two different individuals or companies could go to the same bank and request exactly the same amount of funding for their projects and yet could be required to pay different costs for their funds. 
B) It is important to remember that a public company is a separate entity and in that capacity can borrow from bondholders,preferred stockholders,and common shareholders,but not from banks. 
C) Lenders,regardless of their classification,all consider their funds as investments,for which they hope to make a positive return. 
D) The return to the investor is the cost to the seller.

Question 16

If company earnings reflect a rate of return less than the cost of debt,then more debt ________.

Accepted Answer

A) will increase the percentage of earnings available for distribution to the equity owners 
B) will lower the percentage of earnings available for distribution to the debt owners 
C) will increase the percentage of dividends available for distribution to the equity owners 
D) will lower the percentage of earnings available for distribution to the equity owners 
A) will increase the percentage of earnings available for distribution to the equity owners 
B) will lower the percentage of earnings available for distribution to the debt owners 
C) will increase the percentage of dividends available for distribution to the equity owners 
D) will lower the percentage of earnings available for distribution to the equity owners

Question 17

The ability to add debt financing to the current borrowing of the firm and be able to make interest and principal repayments on time is known as the firm's debt-to-equity ratio.

Accepted Answer

A) True 
 B)False

Question 18

Keystone Generation,Inc.has a project that costs $900,000.It has a 50% chance of paying off $2,000,000 and a 50% chance of paying off $0.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 $10,000. 
B) The expected payoff is $100,000,and the expected profit is $10,000. 
C) The expected payoff is $100,000,and the expected loss is $100,000. 
D) The expected payoff is $1,000,000,and the expected profit is $100,000. 
A) The expected payoff is $1,000,000,and the expected loss is $10,000. 
B) The expected payoff is $100,000,and the expected profit is $10,000. 
C) The expected payoff is $100,000,and the expected loss is $100,000. 
D) The expected payoff is $1,000,000,and the expected profit is $100,000.

Question 19

Leverage magnifies both gains and losses.

Accepted Answer

A) True 
 B)False

Question 20

The federal government bond market is open only to ________.

Accepted Answer

A) state government agencies 
B) local government agencies 
C) the federal government 
D) municipal government 
A) state government agencies 
B) local government agencies 
C) the federal government 
D) municipal government

If earnings reflect a return greater than the cost of debt,then ________.

Capital structure refers to how the firm finances its operations and growth through a combination of ________.

Describe the Pecking Order Hypothesis.

A ________ is a separate entity and in that capacity can borrow from banks,bondholders,preferred stockholders,and common shareholders.

Which of the statements below is FALSE?

Fuji Inc.is registered as a business in the film-making industry.It can borrow in the debt market at 9%.Its cost of equity with 50% debt is 14%.Its corporate tax rate is 40%.If the M&M world of taxes holds,what is the WACC for Fuji with 50% debt financing?

A rising WACC ________ the values of the firm's future cash flows.

The contribution of M&M comes from the fact that there is a constant trade-off ratio.Which of the statements below describe this constant trade-off ratio?

Which of the statements below is FALSE?

Proposition II from M&M says that the cost of equity is a function of which of the items below?

When earnings are less than the cost of debt,it follows that the more debt,the lower the percentage of earnings available for distribution to shareholders.

Which of the statements below is FALSE?

Which of the statements below is FALSE?

If company earnings reflect a rate of return less than the cost of debt,then more debt ________.

The ability to add debt financing to the current borrowing of the firm and be able to make interest and principal repayments on time is known as the firm's debt-to-equity ratio.

Keystone Generation,Inc.has a project that costs $900,000.It has a 50% chance of paying off $2,000,000 and a 50% chance of paying off $0.What is the expected payoff and the expected profit or loss from the new project?

Leverage magnifies both gains and losses.

The federal government bond market is open only to ________.

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

If earnings reflect a return greater than the cost of debt,then ________.

Capital structure refers to how the firm finances its operations and growth through a combination of ________.

Describe the Pecking Order Hypothesis.

A ________ is a separate entity and in that capacity can borrow from banks,bondholders,preferred stockholders,and common shareholders.

Which of the statements below is FALSE?

Fuji Inc.is registered as a business in the film-making industry.It can borrow in the debt market at 9%.Its cost of equity with 50% debt is 14%.Its corporate tax rate is 40%.If the M&M world of taxes holds,what is the WACC for Fuji with 50% debt financing?

A rising WACC ________ the values of the firm's future cash flows.

The contribution of M&M comes from the fact that there is a constant trade-off ratio.Which of the statements below describe this constant trade-off ratio?

Which of the statements below is FALSE?

Proposition II from M&M says that the cost of equity is a function of which of the items below?

When earnings are less than the cost of debt,it follows that the more debt,the lower the percentage of earnings available for distribution to shareholders.

Which of the statements below is FALSE?

Which of the statements below is FALSE?

If company earnings reflect a rate of return less than the cost of debt,then more debt ________.

The ability to add debt financing to the current borrowing of the firm and be able to make interest and principal repayments on time is known as the firm's debt-to-equity ratio.

Keystone Generation,Inc.has a project that costs $900,000.It has a 50% chance of paying off $2,000,000 and a 50% chance of paying off $0.What is the expected payoff and the expected profit or loss from the new project?

Leverage magnifies both gains and losses.

The federal government bond market is open only to ________.

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