Question 1

Greenwood Motels has filed a petition for bankruptcy but hopes to continue its operations both during and after the bankruptcy process.Which one of the following terms best applies to this situation?

Accepted Answer

A)  Chapter 7 bankruptcy
B)  Liquidation
C)  Technical insolvency
D)  Accounting insolvency
E)  ReorganizationF) C) and D)
G) A) and E)

Question 2

Which one of the following is the equity risk arising from the daily operations of a firm?

Accepted Answer

A)  Strategic risk
B)  Financial risk
C)  Liquidity risk
D)  Industry risk
E)  Business riskF) C) and D)
G) A) and D)

Question 3

Weston Mines has a cost of equity of 14.9 percent,a pretax cost of debt of 7.3 percent,and a return on assets of 12.6 percent.Ignore taxes.What is the debt-equity ratio?

Accepted Answer

A)  .52
B)  .84
C)  .43
D)  .77
E)  .56F) None of the above
G) All of the above

Question 4

Which one of the following represents the present value of the interest tax shield?

Accepted Answer

A)  D ×(1 -Tc) 
B)  D(1 -Tc) 
C)  D/Tc
D)  D-D(Tc) 
E)  Tc ×DF) A) and D)
G) None of the above

Question 5

In the process of liquidation,some types of claims receive preference over other claims.Which one of the following determines which type of claim is paid first?

Accepted Answer

A)  Technical insolvency definition
B)  Absolute priority rule
C)  Accounting insolvency definition
D)  Chapter 7 of the Federal Bankruptcy Reform Act of 1978
E)  Securities and Exchange CommissionF) D) and E)
G) None of the above

Question 6

The Tree House has a pretax cost of debt of 7.3 percent and a return on assets of 12.8 percent.The debt-equity ratio is .46.Ignore taxes.What is the cost of equity?

Accepted Answer

A)  14.50 percent
B)  14.82 percent
C)  15.47 percent
D)  14.98 percent
E)  15.33 percentF) B) and C)
G) A) and E)

Question 7

Gulf Shores Inn is comparing two separate capital structures.The first structure consists of 64,000 shares of stock and no debt.The second structure consists of 50,000 shares of stock and $1.01 million of debt.What is the price per share of equity?

Accepted Answer

A)  $75.50
B)  $69.97
C)  $72.14
D)  $68.36
E)  $74.00F) B) and C)
G) A) and C)

Question 8

Northwestern Lumber Products currently has 12,400 shares of stock outstanding and no debt.Patricia,the financial manager,is considering issuing $160,000 of debt at an interest rate of 6.95 percent and using the proceeds to repurchase shares.Given this,how many shares of stock will be outstanding once the debt is issued if the break-even level of EBIT between these two capital structure options is $48,000? Ignore taxes.

Accepted Answer

A)  2,873 shares
B)  3,051 shares
C)  3,025 shares
D)  2,558 shares
E)  2,667 sharesF) C) and D)
G) A) and E)

Question 9

Which one of the following statements related to the static theory of capital structure is correct?

Accepted Answer

A)  A firm begins to lose value as soon as the first dollar of debt is incurred.
B)  The actual value of a firm continually rises in direct proportion to the increased use of debt.
C)  The linear function of a firm's value has a constant positive slope.
D)  A firm's value is maximized when a firm operates at its optimal debt level.
E)  The value of a firm will automatically decrease whenever the debt-equity ratio is decreasedF) A) and D)
G) C) and D)

Exam 13: Leverage and Capital Structure

Which one of the following is the equity risk arising from the daily operations of a firm?

Correct Answer
verified

Which one of the following represents the present value of the interest tax shield?

Correct Answer
verified

Correct Answer
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Greenwood Motels has filed a petition for bankruptcy but hopes to continue its operations both during and after the bankruptcy process.Which one of the following terms best applies to this situation?

Correct Answer
verified

In the process of liquidation,some types of claims receive preference over other claims.Which one of the following determines which type of claim is paid first?

Correct Answer
verified

Which one of the following statements related to the static theory of capital structure is correct?

Correct Answer
verified

The Tree House has a pretax cost of debt of 7.3 percent and a return on assets of 12.8 percent.The debt-equity ratio is .46.Ignore taxes.What is the cost of equity?

Correct Answer
verified

Gulf Shores Inn is comparing two separate capital structures.The first structure consists of 64,000 shares of stock and no debt.The second structure consists of 50,000 shares of stock and $1.01 million of debt.What is the price per share of equity?

Correct Answer
verified

Weston Mines has a cost of equity of 14.9 percent,a pretax cost of debt of 7.3 percent,and a return on assets of 12.6 percent.Ignore taxes.What is the debt-equity ratio?

Correct Answer
verified

Exam 13: Leverage and Capital Structure

Which one of the following is the equity risk arising from the daily operations of a firm?

Correct AnswerverifiedShow Answer

Which one of the following represents the present value of the interest tax shield?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Greenwood Motels has filed a petition for bankruptcy but hopes to continue its operations both during and after the bankruptcy process.Which one of the following terms best applies to this situation?

Correct AnswerverifiedShow Answer

In the process of liquidation,some types of claims receive preference over other claims.Which one of the following determines which type of claim is paid first?

Correct AnswerverifiedShow Answer

Which one of the following statements related to the static theory of capital structure is correct?

Correct AnswerverifiedShow Answer

The Tree House has a pretax cost of debt of 7.3 percent and a return on assets of 12.8 percent.The debt-equity ratio is .46.Ignore taxes.What is the cost of equity?

Correct AnswerverifiedShow Answer

Gulf Shores Inn is comparing two separate capital structures.The first structure consists of 64,000 shares of stock and no debt.The second structure consists of 50,000 shares of stock and $1.01 million of debt.What is the price per share of equity?

Correct AnswerverifiedShow Answer

Weston Mines has a cost of equity of 14.9 percent,a pretax cost of debt of 7.3 percent,and a return on assets of 12.6 percent.Ignore taxes.What is the debt-equity ratio?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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