Add on Chapter 16

41. The capital structure that maximizes the value of a firm also: A. minimizes financial distress costs. B. minimizes the cost of capital. C. maximizes the present value of the tax shield on debt. D. maximizes the value of the debt. E. maximizes the value of the unlevered firm.

B

44. The basic lesson of M & M Theory is that the value of a firm is dependent upon: A. the firm's capital structure. B. the total cash flow of the firm. C. minimizing the marketed claims. D. the amount of marketed claims to that firm. E. size of the stockholders' claims.

B

47. Corporations in the U.S. tend to: A. minimize taxes. B. underutilize debt. C. rely less on equity financing than they should. D. have relatively similar debt-equity ratios across industry lines. E. rely more heavily on debt than on equity as the major source of financing.

B

50. Which one of the following statements related to bankruptcy is correct? A. A firm in Chapter 7 bankruptcy is reorganizing its operations such that it can return to being a viable concern. B. Under a Chapter 7 bankruptcy, a trustee will assume control of the firm's assets until those assets can be liquidated. C. Chapter 7 bankruptcies are always involuntary on the part of the firm. D. Under a Chapter 7 bankruptcy, the claims of creditors are paid prior to the administrative costs of the bankruptcy. E. Chapter 7 bankruptcy allows a firm to restructure its equity such that new shares of stock are generally issued prior to the firm coming out of bankruptcy.

B

49. A firm is technically insolvent when: A. it has a negative book value. B. total debt exceeds total equity. C. it is unable to meet its financial obligations. D. it files for bankruptcy protection. E. the market value of its stock is less than its book value.

C

The optimal capital structure: A. will be the same for all firms in the same industry. B. will remain constant over time unless the firm changes its primary operations. C. will vary over time as taxes and market conditions change. D. places more emphasis on operations than on financing. E. is unaffected by changes in the financial markets.

C

40. Which one of the following has the greatest tendency to increase the percentage of debt included in the optimal capital structure of a firm? A. exceptionally high depreciation expenses B. very low marginal tax rate C. substantial tax shields from other sources D. low probabilities of financial distress E. minimal taxable income

D

53. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: A. permits creditors to file a prepack immediately after a firm files for bankruptcy protection. B. prevents creditors from submitting any reorganization plans. C. prevents firms from filing for bankruptcy protection more than once. D. permits key employee retention plans only if an employee has another job offer. E. allows firms to pay bonuses to all key employees to entice those employees to remain in the firm's employ.

D

52. A firm may file for bankruptcy: I. in an attempt to gain a competitive advantage. II. using a prepack. III. while allowing the current management to continue running the firm. IV. only after the firm becomes insolvent. A. I and III only B. I and II only C. I, II, and IV only D. I, II, and III only E. I, II, III, and IV

D. I, II, and III only

43. The static theory of capital structure advocates that the optimal capital structure for a firm: A. is dependent on a constant debt-equity ratio over time. B. remains fixed over time. C. is independent of the firm's tax rate. D. is independent of the firm's weighted average cost of capital. E. equates the tax savings from an additional dollar of debt to the increased bankruptcy costs related to that additional dollar of debt.

E

45. Which form of financing do firms prefer to use first according to the pecking-order theory? A. regular debt B. convertible debt C. common stock D. preferred stock E. internal funds

E

48. In general, the capital structures used by U.S. firms: A. tend to overweigh debt in relation to equity. B. generally result in debt-equity ratios between 0.45 and 0.60. C. are fairly standard for all SIC codes. D. tend to be those which maximize the use of the firm's available tax shelters. E. vary significantly across industries.

E

51. Which one of the following will generally have the highest priority when assets are distributed in a bankruptcy proceeding? A. consumer claim B. dividend payment to preferred shareholder C. company contribution to the employees' retirement account D. payment to an unsecured creditor E. payment of employee wages

E

46. Which of the following are correct according to pecking-order theory? I. Firms stockpile internally-generated cash. II. There is an inverse relationship between a firm's profit level and its debt level. III. Firms avoid external debt at all costs. IV. A firm's capital structure is dictated by its need for external financing. A. I and III only B. II and IV only C. I, III, and IV only D. I, II, and IV only E. I, II, III, and IV

I, II, and IV only

39. If a firm has the optimal amount of debt, then the: A. direct financial distress costs must equal the present value of the interest tax shield. B. value of the levered firm will exceed the value of the firm if it were unlevered. C. value of the firm is minimized. D. value of the firm is equal to VL + TC × D. E. debt-equity ratio is equal to 1.0. Refer to section 16.6

b