Question 1

For next year,the probability the economy will do well is 82 percent,and Importers Unlimited will have a firm value of $68,000.If the economy tanks,the firm's value will decline to $43,000.The firm owes its bondholders $50,000.What is the value of this firm to its shareholders if the firm will close after next year?

Accepted Answer

A)  $14,760
B)  $13,380
C)  $18,000
D)  $16,410
E)  $13,520F) A) and C)
G) A) and E)

Question 2

The value of a firm is maximized when the

Accepted Answer

A)  weighted average cost of capital is minimized.
B)  levered cost of capital is maximized.
C)  tax rate is zero.
D)  cost of equity is maximized.
E)  debt-equity ratio is minimized.F) C) and D)
G) B) and D)

Question 3

The optimal capital structure will tend to include more debt for firms with

Accepted Answer

A)  less taxable income.
B)  lower probability of financial distress.
C)  substantial tax shields from other sources.
D)  the lowest marginal tax rate.
E)  the highest depreciation deductions.F) B) and D)
G) B) and E)

Question 4

Miller Tool plans on closing its doors after one more year.During its last year in business,the firm expects to generate a cash flow of $76,000 if the economy booms and $58,000 if it does not.The probability of a boom is 15 percent.The firm has debt of $62,500 that is due in 1 year.That debt has a market value of $58,300 today.Ignore taxes.The current promised return on debt is ________ percent,and the expected return on debt is ________ percent.

Accepted Answer

A)  7) 20;8.13
B)  8) 18;1.03
C)  8) 18;9.12
D)  7) 20;0.64
E)  8) 36;1.98F) A) and D)
G) A) and C)

Question 5

The Window Store will have a value of $139,000 if the economy does well this coming year and a value of $121,000 if the economy does poorly.The probability of a good economy is 68 percent.The firm owes its bondholders $63,000.The firm will only operate for one more year.What is the value of this firm to its shareholders?

Accepted Answer

A)  $68,500
B)  $70,240
C)  $70,450
D)  $73,550
E)  $74,660F) B) and D)
G) B) and C)

Question 6

The optimal capital structure has been achieved when the

Accepted Answer

A)  weight of equity is equal to the weight of debt.
B)  debt-equity ratio selected results in the lowest possible weighted average cost of capital.
C)  firm is totally financed with debt.
D)  debt-equity ratio is such that the cost of debt exceeds the cost of equity.
E)  cost of equity is maximized.F) A) and E)
G) A) and B)

Question 7

The protective covenants contained within a loan agreement

Accepted Answer

A)  impose restrictions on the lender.
B)  are designed to protect the borrower's shareholders.
C)  increase the borrower's flexibility.
D)  tend in increase the bond's interest rate.
E)  can increase the value of the borrowing firm.F) C) and D)
G) A) and C)

Question 8

The complete termination of a firm as a going business concern is called a

Accepted Answer

A)  merger.
B)  repurchase program.
C)  liquidation.
D)  divestiture.
E)  reorganization.F) C) and E)
G) B) and E)

Question 9

The pecking order theory identifies two rules.The first rule is to

Accepted Answer

A)  issue convertible debt prior to straight debt to save funds.
B)  use short-term debt to its maximum available limit prior to issuing long-term debt.
C)  issue new equity first in order to retain internal funds and avoid interest costs.
D)  issue new debt prior to new equity.
E)  use internal financing prior to external financing.F) A) and B)
G) B) and E)

Question 10

Which one of these describes a bankruptcy situation known as a "cram down"?

Accepted Answer

A)  The absolute priority rule forces common shareholder claims to the very bottom of the payee list.
B)  Creditors are forced to accept a bankruptcy plan that they voted to reject.
C)  The filing firm can be forced by the court to accept a plan submitted by the firm's creditors.
D)  Shareholders are forced to forfeit all of their claims on the bankrupt firm.
E)  A firm submits a reorganization plan simultaneously with its bankruptcy petition thereby forcing the court to agree to the submitted plan.F) C) and E)
G) A) and B)

Question 11

Which one of these statements most applies to a firm that is suffering from financial distress?

Accepted Answer

A)  Bondholders will desire high risk projects in order to protect their investment.
B)  Stockholders will increase their investment in the firm to protect their current investment.
C)  Stockholders will generally prefer low-risk over high-risk projects.
D)  Managers will tend to lower dividends in an effort to protect shareholder value.
E)  Stockholders will bear the cost of selfish investment strategies through higher interest payments.F) C) and E)
G) None of the above

Question 12

Issuing debt instead of new equity in a closely held firm more likely causes owner-managers to

Accepted Answer

A)  work harder than they would if equity had been issued.
B)  consume more perquisites because the cost is passed on to the debtholders.
C)  enjoy more leisure time than they would with an equity issue.
D)  accept more unprofitable projects.
E)  shirk their duties as they have less capital at risk.F) B) and C)
G) C) and D)

Question 13

Which one of these statements is correct?

Accepted Answer

A)  Only the nonmarketed claims of a firm can be bought and sold.
B)  An increase in a firm's marketed claims will increase the total value of a firm.
C)  The total value of a firm is independent of the firm's cash flows.
D)  Managers try to maximize both marketed and nonmarketed claims in order to maximize total firm value.
E)  The value of a firm's marketed claims can change with changes in the firm's capital structure.F) All of the above
G) A) and D)

Question 14

Burger Queen has a value of $38,000 in a good economy and $24,000 in a recession.The firm has $25,000 of debt.The probability of a recession is 50 percent.The firm is considering a project that would change the firm values to $42,000 in a good economy and $22,000 in a recession.Will shareholders accept this project? Will bondholders like this project?

Accepted Answer

A)  Both shareholders and bondholders will like this project.
B)  Neither shareholders nor bondholders will like this project.
C)  Shareholders,but not bondholders,will like this project.
D)  Bondholders,but not shareholders,will like this project.
E)  Shareholders will like this project but bondholders will be indifferent.F) B) and C)
G) A) and C)

Question 15

The optimal capital structure of a firm

Accepted Answer

A)  will remain constant over time unless the firm makes an acquisition.
B)  is unaffected by changes in the financial markets.
C)  will be the same for all firms in the same industry.
D)  places more emphasis on the operations than on the financing of the firm.
E)  will vary over time as taxes and market conditions change.F) B) and D)
G) A) and C)

Question 16

The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as ________ costs.

Accepted Answer

A)  indirect bankruptcy
B)  direct bankruptcy
C)  financial solvency
D)  capital structure
E)  flotationF) A) and E)
G) A) and D)

Exam 15: Capital Structure: Limits to the Use of Debt

The complete termination of a firm as a going business concern is called a

Correct Answer
verified

The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as ________ costs.

Correct Answer
verified

The optimal capital structure will tend to include more debt for firms with

Correct Answer
verified

Which one of these statements most applies to a firm that is suffering from financial distress?

Correct Answer
verified

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Which one of these statements is correct?

Correct Answer
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Which one of these describes a bankruptcy situation known as a "cram down"?

Correct Answer
verified

The optimal capital structure has been achieved when the

Correct Answer
verified

The optimal capital structure of a firm

Correct Answer
verified

Correct Answer
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The value of a firm is maximized when the

Correct Answer
verified

Issuing debt instead of new equity in a closely held firm more likely causes owner-managers to

Correct Answer
verified

The protective covenants contained within a loan agreement

Correct Answer
verified

Correct Answer
verified

The pecking order theory identifies two rules.The first rule is to

Correct Answer
verified

Correct Answer
verified

Exam 15: Capital Structure: Limits to the Use of Debt

The complete termination of a firm as a going business concern is called a

Correct AnswerverifiedShow Answer

The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as ________ costs.

Correct AnswerverifiedShow Answer

The optimal capital structure will tend to include more debt for firms with

Correct AnswerverifiedShow Answer

Which one of these statements most applies to a firm that is suffering from financial distress?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of these statements is correct?

Correct AnswerverifiedShow Answer

Which one of these describes a bankruptcy situation known as a "cram down"?

Correct AnswerverifiedShow Answer

The optimal capital structure has been achieved when the

Correct AnswerverifiedShow Answer

The optimal capital structure of a firm

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The value of a firm is maximized when the

Correct AnswerverifiedShow Answer

Issuing debt instead of new equity in a closely held firm more likely causes owner-managers to

Correct AnswerverifiedShow Answer

The protective covenants contained within a loan agreement

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The pecking order theory identifies two rules.The first rule is to

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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