Chapter 13

Which of the following statements is CORRECT, holding other things constant?

e. An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure.

Which of the following statements is correct?

If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense. However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense

Which of the following statements best describes the optimal capital structure? The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company's ____

stock price

In the real world, dividends

are usually more stable than earnings

The possibility of bankruptcy will do all of the following except:

C) reduce the interest rate on debt.

The optimal capital structure is the mixture of debt and equity which: I. Maximizes the value of the firm. II. Maximizes the firm's weighted average cost of capital. III. Maximizes the market price of the firm's bonds.

I only

Which of the following statements is correct?

Stock repurchases can be used by a firm that wants to increase its debt ratio

Business risk is affected by a firm's operations. Which of the following is NOT associated with (or does not contribute to) business risk?

The extent to which interest rates on the firm's debt fluctuate.

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.

Which of the following factors is likely to encourage a corporation to increase the proportion of debt in its capital structure?

a. An increase in the corporate tax rate.

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.

The tax savings of the firm derived from the deductibility of interest expense is called the:

a. Interest tax shield.

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 firm's stock is overvalued. d. Statements a and b are correct. (e.) None of the statements above is correct.

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. 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

Which of the following statements is most correct?

a. The optimal capital structure minimizes the WACC. c. Increasing the amount of debt in a firm's capital structure is likely to increase the costs of both debt and equity financing.

The major contribution of the Miller Model is that it demonstrates that

b. personal taxes decrease the value of using corporate debt

Reynolds Resorts is currently 100% equity financed. The CFO is considering a recapitalization plan under which the firm would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock. The recapitalization would not change the company's total assets, nor would it affect the firm's basic earning power, which is currently 15%. The CFO believes that this recapitalization would reduce the WACC and increase stock price. Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan?

c. The company's cost of equity would increase

Which of the following statements is CORRECT?

c. The debt ratio that maximizes EPS generally exceeds the debt ratio that maximizes share price

The firm's target capital structure should be consistent with which of the following statements?

d. Minimize the weighted average cost of capital

f debt financing is used, which of the following is CORRECT?

d. The percentage change in net income will be greater than the percentage change in net operating income.

Daylight Solutions is considering a recapitalization that would increase its debt ratio and increase its interest expense. The company would issue new bonds and use the proceeds to buy back shares of its common stock. The company's CFO thinks the plan will not change total assets or operating income, but that it will increase earnings per share (EPS). Assuming the CFO's estimates are correct, which of the following statements is CORRECT?

e. Since the proposed plan increases Daylight's financial risk, the company's stock price still might fall even if EPS increases

Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure?

e. The corporate tax rate increases

Which of the following statements is CORRECT?

e. The optimal capital structure simultaneously maximizes stock price and minimizes the WACC

Which of the following statements concerning the MM extension with growth is NOT CORRECT?

e. The tax shields should be discounted at the cost of debt.

Which of the following statements concerning the MM extension with growth is false ?

e. The total value of the firm is independent of the amount of debt.

If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

no dividends were paid during the year.