Capital Structure Concepts

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Questions Bank

The Role and Objective of Financial Management
The Domestic and International Financial Marketplace
Evaluation of Financial Performance
Financial Planning and Forecasting
The Time Value of Money
Fixed Income Securities: Characteristics and Valuation
Common Stock: Characteristics, Valuation, and Issuance
Analysis of Risk and Return
Capital Budgeting and Cash Flow Analysis
Capital Budgeting: Decision Criteria and Real Option Considerations
Capital Budgeting and Risk
The Cost of Capital
Capital Structure Concepts
Capital Structure Management in Practice
Dividend Policy
Working Capital Policy and Short-term Financing
The Management of Cash and Marketable Securities
Management of Accounts Receivable and Inventories
Lease and Intermediate-term Financing
Financing With Derivatives
Risk Management
International Financial Management
Corporate Restructuring
Appendix: Continuous Compounding and Discounting
Appendix: Mutually Exclusive Investments Having Unequal Lives
Appendix: Breakeven Analysis
Appendix: Bond Refunding Analysis
Appendix: Taxes

All Questions

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.

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financial distress costs

agency costs

holding costs

financial distress costs and agency costs

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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.

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reinvestment

capital asset pricing model

arbitraging

compound interest

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Question 3

Free

Multiple Choice

Two prominent finance researchers (Modigliani and Miller) showed that

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

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

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

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

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Question 4

Free

Multiple Choice

Perfect capital markets imply the following:

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there are no transactions costs for buying and selling securities

relevant information is unavailable for individuals

all investors can borrow and lend at the same rate

a single investor can influence security prices

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Question 5

Free

Multiple Choice

With an optimal capital structure

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overall capital costs are minimized

the net present value of new projects is minimized

financial leverage is minimized

the weighted cost of capital is maximized

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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

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increase

decrease

remain unchanged; there is no relationship between the two

initially rise rapidly, then increase slowly beyond some point

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Question 7

Multiple Choice

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

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initially rises slowly, then falls beyond some point

increases at a steady rate throughout the entire range

beyond some point, becomes greater than the cost of equity

initially rises slowly, then increases rapidly beyond some point

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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)?

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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.

The precise relationship between the cost of debt and the debt ratio is simple to determine.

The relationship is a saucer-shaped curve.

The relationship is determined by the static tradeoff theory.

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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)?

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The exact relationship between the cost of equity and the debt ratio is difficult to determine.

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.

The relationship is a saucer-shaped curve.

The relationship is determined by the static tradeoff theory.

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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

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financial structure

capital structure

target capital structure

optimal financial structure

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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

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optimal corporate structure

target financial structure

optimal capital structure

optimal degree of combined leverage

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Question 12

Multiple Choice

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

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corporate capital gains

business risk

potential bankruptcy risk

agency costs

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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.

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net income

earnings before taxes

operating income

debt

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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.

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greater, greater

smaller, less

greater, less

smaller, greater

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Question 15

Multiple Choice

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

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degree of operating leverage

variability of interest rates

variability of operating costs

variability of selling prices

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Question 16

Multiple Choice

Operating leverage involves the use of

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equity and debt in equal proportions

market power

debt

assets having fixed costs

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Question 17

Multiple Choice

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

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financial risk

degree of operating leverage

market power

business risk

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Question 18

Multiple Choice

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

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operating leverage

a leveraged buyout

financial leverage

combined leverage

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Question 19

Multiple Choice

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

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maximization of earnings per share

shareholder wealth maximization

maximization of net income

maximization of the current period's dividends

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Question 20

Multiple Choice

Financial leverage benefits shareholders when the

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return on assets is greater than the cost of debt

return on equity is greater than the cost of debt

return on investments is less than the weighted cost of capital

return on equity is less than the cost of debt

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Capital Structure Concepts

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.

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

Two prominent finance researchers (Modigliani and Miller) showed that

Perfect capital markets imply the following:

With an optimal capital structure

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

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

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)?

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)?

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

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

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

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.

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

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

Operating leverage involves the use of

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

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

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

Financial leverage benefits shareholders when the

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