Capital Structure Concepts

This question bank verified by Studydeets
All Questions
Filter by:
Question 1
Free
Multiple Choice

In analyzing the value of the firm as a function of capital structure, the present value of the tax shield benefit is offset by the present value of the expected ____ , resulting in an interior optimal capital structure.

Choose correct answer/s
A

financial distress costs

B

agency costs

C

holding costs

D

financial distress costs and agency costs

Check answer
Question 2
Free
Multiple Choice

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

Choose correct answer/s
A

reinvestment

B

capital asset pricing model

C

arbitraging

D

compound interest

Check answer
Question 3
Free
Multiple Choice

Two prominent finance researchers (Modigliani and Miller) showed that

Choose correct answer/s
A

the firm's optimal capital structure consists of approximately equal proportions of debt and equity

B

the value of the firm is independent of its capital structure in perfect capital markets with no income taxes

C

the firm's cost of capital is minimized when its capital structure consists of approximately equal proportions of debt and equity

D

the firm's cost of capital is maximized when its capital structure consists of approximately equal proportions of debt and equity

Check answer
Question 4
Free
Multiple Choice

Perfect capital markets imply the following:

Choose correct answer/s
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

Check answer
Question 5
Free
Multiple Choice

With an optimal capital structure

Choose correct answer/s
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

Check answer
Question 6
Multiple Choice

Holding all other things equal, as the relative amount of debt in the capital structure of the firm increases, the cost of equity capital will

Choose correct answer/s
A
increase
B
decrease
C
remain unchanged; there is no relationship between the two
D
initially rise rapidly, then increase slowly beyond some point
To unlock the question
Question 7
Multiple Choice

As more debt is added to the capital structure of a firm, the cost of debt capital

Choose correct answer/s
A
initially rises slowly, then falls beyond some point
B
increases at a steady rate throughout the entire range
C
beyond some point, becomes greater than the cost of equity
D
initially rises slowly, then increases rapidly beyond some point
To unlock the question
Question 8
Multiple Choice

Which of the following statements is true regarding the relationship between the firm's cost of debt and its capital structure (as measured by the debt ratio)?

Choose correct answer/s
A
The range of debt ratios where the cost of debt begins to increase rapidly varies by firm and industry, depending on the level of business risk.
B
The precise relationship between the cost of debt and the debt ratio is simple to determine.
C
The relationship is a saucer-shaped curve.
D
The relationship is determined by the static tradeoff theory.
To unlock the question
Question 9
Multiple Choice

Which of the following statements is (are) true concerning the relationship between the firm's cost of equity and its capital structure (as measured by the debt ratio)?

Choose correct answer/s
A
The exact relationship between the cost of equity and the debt ratio is difficult to determine.
B
The range of debt ratios where the cost of equity begins to increase rapidly varies by firm and industry depending on the firm's age.
C
The relationship is a saucer-shaped curve.
D
The relationship is determined by the static tradeoff theory.
To unlock the question
Question 10
Multiple Choice

The amount of permanent short-term debt, long-term debt, preferred stock, and common stock used to finance a firm defines the firm's

Choose correct answer/s
A
financial structure
B
capital structure
C
target capital structure
D
optimal financial structure
To unlock the question
Question 11
Multiple Choice

The mix of debt, preferred stock, and common equity that minimizes the weighted cost of capital to the firm is known as the

Choose correct answer/s
A
optimal corporate structure
B
target financial structure
C
optimal capital structure
D
optimal degree of combined leverage
To unlock the question
Question 12
Multiple Choice

The optimal capital structure is determined by several factors including all of the following except:

Choose correct answer/s
A
corporate capital gains
B
business risk
C
potential bankruptcy risk
D
agency costs
To unlock the question
Question 13
Multiple Choice

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.

Choose correct answer/s
A
net income
B
earnings before taxes
C
operating income
D
debt
To unlock the question
Question 14
Multiple Choice

Generally the ____ a firm's business risk, the ____ the amount of financial leverage that will be used in the optimal capital structure.

Choose correct answer/s
A
greater, greater
B
smaller, less
C
greater, less
D
smaller, greater
To unlock the question
Question 15
Multiple Choice

All of the following factors influence a firm's business risk except:

Choose correct answer/s
A
degree of operating leverage
B
variability of interest rates
C
variability of operating costs
D
variability of selling prices
To unlock the question
Question 16
Multiple Choice

Operating leverage involves the use of

Choose correct answer/s
A
equity and debt in equal proportions
B
market power
C
debt
D
assets having fixed costs
To unlock the question
Question 17
Multiple Choice

The use of fixed cost sources of funds, such as debt and preferred stock affect a firm's ____ .

Choose correct answer/s
A
financial risk
B
degree of operating leverage
C
market power
D
business risk
To unlock the question
Question 18
Multiple Choice

The use of fixed-cost financing sources is referred to as the use of

Choose correct answer/s
A
operating leverage
B
a leveraged buyout
C
financial leverage
D
combined leverage
To unlock the question
Question 19
Multiple Choice

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

Choose correct answer/s
A
maximization of earnings per share
B
shareholder wealth maximization
C
maximization of net income
D
maximization of the current period's dividends
To unlock the question
Question 20
Multiple Choice

Financial leverage benefits shareholders when the

Choose correct answer/s
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
To unlock the question