Financial Leverage And Capital Structure Policy

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Introduction to Corporate Finance
Financial Statements,Taxes,and Cash Flow
Working With Financial Statements
Long-Term Financial Planning and Growth
Introduction to Valuation: The Time Value of Money
Discounted Cash Flow Valuation
Interest Rates and Bond Valuation
Stock Valuation
Net Present Value and Other Investment Criteria
Making Capital Investment Decisions
Project Analysis and Evaluation
Some Lessons From Capital Market History
Return,Risk,and the Security Market Line
Cost of Capital
Raising Capital
Financial Leverage and Capital Structure Policy
Dividends and Payout Policy
Short-Term Finance and Planning
Cash and Liquidity Management
Credit and Inventory Management
International Corporate Finance
Behavioral Finance: Implications for Financial Management
Enterprise Risk Management
Options and Corporate Finance
Option Valuation
Mergers and Acquisitions
Leasing

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Question 1

Free

Multiple Choice

Homemade leverage is:

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the incurrence of debt by a corporation in order to pay dividends to shareholders.

the exclusive use of debt to fund a corporate expansion project.

the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage.

best defined as an increase in a firm's debt-equity ratio.

the term used to describe the capital structure of a levered firm.

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Question 2

Free

Multiple Choice

Which one of the following states that the value of a firm is unrelated to the firm's capital structure?

Choose correct answer/s

Capital Asset Pricing Model

M & M Proposition I

M & M Proposition II

Law of One Price

Efficient Markets Hypothesis

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Question 3

Free

Multiple Choice

Which one of the following states that a firm's cost of equity capital is directly and proportionally related to the firm's capital structure?

Choose correct answer/s

Capital Asset Pricing Model

M & M Proposition I

M & M Proposition II

Law of One Price

Efficient Markets Hypothesis

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Question 4

Free

Multiple Choice

Which one of the following is the equity risk that is most related to the daily operations of a firm?

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market risk

systematic risk

extrinsic risk

business risk

financial risk

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Question 5

Free

Multiple Choice

Which one of the following is the equity risk related to a firm's capital structure policy?

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market

systematic

extrinsic

business

financial

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Question 6

Multiple Choice

Butter & Jelly reduced its taxes last year by $350 by increasing its interest expense by $1,000.Which of the following terms is used to describe this tax savings?

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interest tax shield

interest credit

financing shield

current tax yield

tax-loss interest

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Question 7

Multiple Choice

The unlevered cost of capital refers to the cost of capital for a(n):

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private entity.

all-equity firm.

governmental entity.

private individual.

corporate shareholder.

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Question 8

Multiple Choice

The explicit costs,such as legal and administrative expenses,associated with corporate default are classified as _____ costs.

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flotation

issue

direct bankruptcy

indirect bankruptcy

unlevered

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Question 9

Multiple Choice

The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs.

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flotation

direct bankruptcy

indirect bankruptcy

financial solvency

capital structure

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Question 10

Multiple Choice

By definition,which of the following costs are included in the term "financial distress costs"?
I)direct bankruptcy costs
II)indirect bankruptcy costs
III)direct costs related to being financially distressed,but not bankrupt
IV)indirect costs related to being financially distressed,but not bankrupt

Choose correct answer/s

I only

III only

I and II only

III and IV only

I, II, III, and IV

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Question 11

Multiple Choice

The proposition that a firm borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs is called:

Choose correct answer/s

the static theory of capital structure.

M & M Proposition I.

M & M Proposition II.

the capital asset pricing model.

the open markets theorem.

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Question 12

Multiple Choice

Which one of the following is the legal proceeding under which an insolvent firm can be reorganized?

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restructure process

bankruptcy

forced merger

legal takeover

rights offer

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Question 13

Multiple Choice

A business firm ceases to exist as a going concern as a result of which one of the following?

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divestiture

share repurchase

liquidation

reorganization

capital restructuring

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Question 14

Multiple Choice

Edwards Farm Products was unable to meet its financial obligations and was forced into using legal proceedings to restructure itself so that it could continue as a viable business.The process this firm underwent is known as a:

Choose correct answer/s

merger.

repurchase program.

liquidation.

reorganization.

divestiture.

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Question 15

Multiple Choice

The absolute priority rule determines:

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when a firm must be declared officially bankrupt.

how a distressed firm is reorganized.

which judge is assigned to a particular bankruptcy case.

how long a reorganized firm is allowed to remain under bankruptcy protection.

which parties receive payment first in a bankruptcy proceeding.

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Question 16

Multiple Choice

A firm should select the capital structure that:

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produces the highest cost of capital.

maximizes the value of the firm.

minimizes taxes.

is fully unlevered.

equates the value of debt with the value of equity.

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Question 17

Multiple Choice

The value of a firm is maximized when the:

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cost of equity is maximized.

tax rate is zero.

levered cost of capital is maximized.

weighted average cost of capital is minimized.

debt-equity ratio is minimized.

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Question 18

Multiple Choice

The optimal capital structure has been achieved when the:

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debt-equity ratio is equal to 1.

weight of equity is equal to the weight of debt.

cost of equity is maximized given a pre-tax cost of debt.

debt-equity ratio is such that the cost of debt exceeds the cost of equity.

debt-equity ratio results in the lowest possible weighted average cost of capital.

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Question 19

Multiple Choice

AA Tours is comparing two capital structures to determine how to best finance its operations.The first option consists of all equity financing.The second option is based on a debt-equity ratio of 0.45.What should AA Tours do if its expected earnings before interest and taxes (EBIT)are less than the break-even level? Assume there are no taxes.

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select the leverage option because the debt-equity ratio is less than 0.50

select the leverage option since the expected EBIT is less than the break-even level

select the unlevered option since the debt-equity ratio is less than 0.50

select the unlevered option since the expected EBIT is less than the break-even level

cannot be determined from the information provided

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Question 20

Multiple Choice

You have computed the break-even point between a levered and an unlevered capital structure.Assume there are no taxes.At the break-even level,the:

Choose correct answer/s

firm is just earning enough to pay for the cost of the debt.

firm's earnings before interest and taxes are equal to zero.

earnings per share for the levered option are exactly double those of the unlevered option.

advantages of leverage exceed the disadvantages of leverage.

firm has a debt-equity ratio of .50.

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Financial Leverage And Capital Structure Policy

Homemade leverage is:

Which one of the following states that the value of a firm is unrelated to the firm's capital structure?

Which one of the following states that a firm's cost of equity capital is directly and proportionally related to the firm's capital structure?

Which one of the following is the equity risk that is most related to the daily operations of a firm?

Which one of the following is the equity risk related to a firm's capital structure policy?

Butter & Jelly reduced its taxes last year by $350 by increasing its interest expense by $1,000.Which of the following terms is used to describe this tax savings?

The unlevered cost of capital refers to the cost of capital for a(n):

The explicit costs,such as legal and administrative expenses,associated with corporate default are classified as _____ costs.

The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs.

By definition,which of the following costs are included in the term "financial distress costs"?I)direct bankruptcy costsII)indirect bankruptcy costsIII)direct costs related to being financially distressed,but not bankruptIV)indirect costs related to being financially distressed,but not bankrupt

The proposition that a firm borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs is called:

Which one of the following is the legal proceeding under which an insolvent firm can be reorganized?

A business firm ceases to exist as a going concern as a result of which one of the following?

Edwards Farm Products was unable to meet its financial obligations and was forced into using legal proceedings to restructure itself so that it could continue as a viable business.The process this firm underwent is known as a:

The absolute priority rule determines:

A firm should select the capital structure that:

The value of a firm is maximized when the:

The optimal capital structure has been achieved when the:

You have computed the break-even point between a levered and an unlevered capital structure.Assume there are no taxes.At the break-even level,the:

By definition,which of the following costs are included in the term "financial distress costs"?
I)direct bankruptcy costs
II)indirect bankruptcy costs
III)direct costs related to being financially distressed,but not bankrupt
IV)indirect costs related to being financially distressed,but not bankrupt