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    Questions On Capital Structure: Leverage and Capital Structure Answer: A Diff: E

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    TeddyPeter
    The document contains 9 multiple choice questions regarding capital structure and leverage. The questions cover topics such as the optimal capital structure, factors that influence a company's debt ratio, and theories around capital structure such as signaling theory and the trade-off theory. The questions have a single best answer format with the correct answer provided for reference.

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    Questions On Capital Structure: Leverage and Capital Structure Answer: A Diff: E

    Uploaded by

    TeddyPeter
    642 views3 pages
    The document contains 9 multiple choice questions regarding capital structure and leverage. The questions cover topics such as the optimal capital structure, factors that influence a company's debt ratio, and theories around capital structure such as signaling theory and the trade-off theory. The questions have a single best answer format with the correct answer provided for reference.

    Original Description:

    cost of capital

    Original Title

    Capital Sttructure

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    The document contains 9 multiple choice questions regarding capital structure and leverage. The questions cover topics such as the optimal capital structure, factors that influence a company's debt ratio, and theories around capital structure such as signaling theory and the trade-off theory. The questions have a single best answer format with the correct answer provided for reference.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    642 views3 pages

    Questions On Capital Structure: Leverage and Capital Structure Answer: A Diff: E

    Uploaded by

    TeddyPeter
    The document contains 9 multiple choice questions regarding capital structure and leverage. The questions cover topics such as the optimal capital structure, factors that influence a company's debt ratio, and theories around capital structure such as signaling theory and the trade-off theory. The questions have a single best answer format with the correct answer provided for reference.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Questions on Capital Structure

    Optimal capital structure Answer: e Diff: E


    1. Which of the following statements is most correct?

    a. As a rule, the optimal capital structure is found by determining the debt-equity
    mix that maximizes expected EPS.
    b. The optimal capital structure simultaneously maximizes EPS and minimizes
    the WACC.
    c. The optimal capital structure minimizes the cost of equity, which is a
    necessary condition for maximizing the stock price.
    d. The optimal capital structure simultaneously minimizes the cost of debt, the
    cost of equity, and the WACC.
    e. None of the statements above is correct.


    Leverage and capital structure Answer: e Diff: E
    2.. Which of the following statements is most correct?

    a. A reduction in the corporate tax rate is likely to increase the debt ratio of the
    average corporation.
    b. An increase in the personal tax rate is likely to increase the debt ratio of the
    average corporation.
    c. If changes in the bankruptcy code make bankruptcy less costly to
    corporations, then this would likely reduce the debt ratio of the average
    corporation.
    d. All of the statements above are correct.
    e. None of the statements above is correct.

    Leverage and capital structure Answer: e Diff: E
    3.. Which of the following statements is likely to encourage a firm to increase its
    debt ratio in its capital structure?

    a. Its sales become less stable over time.
    b. Its corporate tax rate declines.
    c. Management believes that the firms stock is overvalued.
    d. Statements a and b are correct.
    e. None of the statements above is correct.

    Leverage and capital structure Answer: a Diff: E
    4. Whi ch of t he f ol l owi ng f act or s i s l i kel y t o encour age a cor por at i on
    t o i ncr ease t he pr opor t i on of debt i n i t s capi t al st r uct ur e?

    a. An i ncr ease i n t he cor por at e t ax r at e.
    b. An i ncr ease i n t he company s degr ee of oper at i ng l ever age.
    d. The company s asset s become l ess l i qui d.
    e. An i ncr ease i n expect ed bankr upt cy cost s.



    Capital structure and WACC Answer: d Diff: M
    5. Which of the following statements is most correct?

    a. The optimal capital structure minimizes the WACC.
    b. If the after-tax cost of equity financing exceeds the after-tax cost of debt
    financing, firms are always able to reduce their WACC by increasing the
    amount of debt in their capital structure.
    c. Increasing the amount of debt in a firms capital structure is likely to increase
    the costs of both debt and equity financing.
    d. Statements a and c are correct.
    e. Statements b and c are correct.


    6. The possibility of bankruptcy will do all of the following except:
    A) increase financial distress costs.
    B) reduce the current market value of the firm.
    C) reduce the interest rate on debt.
    D) reduce the possible payoff to stockholders.



    7. The tax savings of the firm derived from the deductibility of interest expense is
    called the:
    a. Interest tax shield.
    b. Depreciable basis.
    c. Financing umbrella.
    d. Current yield.
    e. Tax-loss carryforward savings.


    8.
    The optimal capital structure is the mixture of debt and equity which:
    I. Maximizes the value of the firm.
    II. Maximizes the firms weighted average cost of capital.
    III. Maximizes the market price of the firms bonds.
    a. I only
    b. III only
    c. I and II only
    d. I and III only
    e. I, II and III



    9.
    Which of the following statements about capital structure theory is most correct?

    a. Signaling theory suggests firms should in normal times maintain reserve
    borrowing capacity that can be used if an especially good investment
    opportunity comes along.
    b. In general, an increase in the corporate tax rate would cause firms to use less
    debt in their capital structures.
    c. According to the trade-off theory (case III discussed in our class), an
    increase in the costs of bankruptcy would lead firms to reduce the amount of
    debt in their capital structures.
    d. Statements a and c are correct.

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