Question 1

Calculate the market value of a firm with total assets of $60 million and a net worth of $35 million. The firm's cost of equity is 15% and the cost of perpetual debt is 8%. The firm has a perpetual net operating income (EBIT) of $4.5 million and a marginal tax rate of 35%.

Accepted Answer

A)  $41.67 million 
B)  $30.00 million 
C)  $35.83 million 
D)  $30.83 million

Question 2

Perfect capital markets imply the following:

Accepted Answer

A)  there are no transactions costs for buying and selling securities 
B)  relevant information is unavailable for individuals 
C)  all investors can borrow and lend at the same rate 
D)  a single investor can influence security prices

Question 3

The objective of capital structure management is to find the capital mix that leads to

Accepted Answer

A)  maximization of earnings per share 
B)  shareholder wealth maximization 
C)  maximization of net income 
D)  maximization of the current period's dividends

Question 4

The Modigliani-Miller theory that the value of the firm is independent of its capital structure is based on a(n) ____ process.

Accepted Answer

A)  reinvestment 
B)  capital asset pricing model 
C)  arbitraging 
D)  compound interest

Question 5

List the factors that determine the specific capital structure for a multinational firm.

Accepted Answer

The answer of List the factors that determine the specific...

Question 6

Studies of capital structure changes have found that actions that increase leverage have generally been associated with ____ stock returns and actions that decrease leverage are associated with ____ stock returns.

Accepted Answer

A)  negative, positive 
B)  negative, no change in 
C)  positive, negative 
D)  no change in, negative

Question 7

The managerial implications of capital structure theory include all of the following except:

Accepted Answer

A)  capital structure changes transmit important information to investors 
B)  changes in capital structure result in changes in the market value of the firm's equity 
C)  optimal capital structure is influenced heavily by the business risk facing the firm 
D)  tax shield benefits from equity lead to increased firm value

Question 8

Explain how industry effects need to be considered in the capital structure decision.

Accepted Answer

The answer of Explain how industry effects need to be...

Question 9

With an optimal capital structure

Accepted Answer

A)  overall capital costs are minimized 
B)  the net present value of new projects is minimized 
C)  financial leverage is minimized 
D)  the weighted cost of capital is maximized

Question 10

A firm with highly liquid assets plus unused debt capacity is said to have ____.

Accepted Answer

A)  arbitrage structural capacity 
B)  the optimal capital structure 
C)  financial slack 
D)  optimal financial structure

Question 11

Financial leverage benefits shareholders when the

Accepted Answer

A)  return on assets is greater than the cost of debt 
B)  return on equity is greater than the cost of debt 
C)  return on investments is less than the weighted cost of capital 
D)  return on equity is less than the cost of debt

Question 12

One of the primary assumptions of capital structure analysis is that the level and variability of ____ is not expected to change as changes in capital structure are contemplated.

Accepted Answer

A)  net income 
B)  earnings before taxes 
C)  operating income 
D)  debt

Question 13

How do signaling effects impact the firm's capital structure decision?

Accepted Answer

The answer of How do signaling effects impact the firm's...

Question 14

What is the annual tax shield to a firm that has total assets of $80 million and a net worth of $55 million, if the average interest rate on debt is 8.5%, the average return on equity is 14%, and the marginal tax rate is 35%?

Accepted Answer

A)  $2.125 million 
B)  $1.87 million 
C)  $0.85 million 
D)  $0.744 million

Question 15

The optimal capital structure is a function of ____.

Accepted Answer

A)  corporate income taxes 
B)  financial distress costs 
C)  agency costs 
D)  corporate income taxes, financial distress costs, and agency costs

Exam 13: Capital Structure Concepts