Finance-Ch13
Case 2 Assumptions
- Corporate taxes, but no personal taxes - No bankruptcy costs
M&M Proposition II
A firm's cost of equity capital is a positive linear function of its capital structure
a legal proceeding for liquidating or reorganizing a business.
Bankruptcy is best defined as:
Case 3 Assumptions
Corporate taxes, but no personal taxes Bankruptcy costs
capital structure
Financial risk is the risk associated with a firm's:
termination of a firm as a going concern
Liquidation is defined as the:
VU + (TC D)
M&M Proposition I, with taxes, states that the value of a levered (VL) firm is equal to:
Case 1 Assumptions
No corporate or personal taxes No bankruptcy costs
indirect bankruptcy
The costs incurred by a firm in an effort to avoid filing for bankruptcy are called _____ costs.
financial distress
The direct and indirect costs of bankruptcy are also called _____ costs.
business risk
The equity risk that derives from a firm's daily operations is referred to as:
absolute priority rule
The list that establishes the order of claims in a liquidation is referred to as the:
M&M Proposition II
The theory that a firm's cost of equity capital is a positive linear function of its capital structure is referred to as:
homemade leverage
The use of borrowing by an individual to adjust his or her overall exposure to financial leverage is referred to as:
M&M Proposition I (def)
The value of the firm is independent of its capital structure
M&M Proposition I, without taxes
Which one of the following advocates that the value of a firm remains constant as the firm's debt-equity ratio increases?
hiring an attorney to prepare legal documents needed for the bankruptcy proceedings
Which one of the following is an example of a direct bankruptcy cost?
Financial leverage magnifies both profits and losses.
Which one of the following statements concerning financial leverage is correct?
bankruptcy administrative expenses
Which one of the following will generally receive the highest priority in a bankruptcy liquidation, assuming that the absolute priority rule is followed?
bankruptcy
a legal proceeding for liquidating or reorganizing a business
reorganization
financial restructuring of a failing firm to attempt to continue operations as a going concern
liquadation
termination of the firm as a going concern involves selling off the assets of the firm
indirect bankruptcy costs
the costs of avoiding a bankruptcy filing incurred by a financially distressed firm
direct bankruptcy costs
the costs that are directly associated with bankruptcy such as legal and administrative expenses
financial distress costs
the direct and indirect costs associated with going bankrupt or experiencing financial distress
financial risk
the equity risk that comes from the financial policy (the capital structure) of the firm
business risk
the equity risk that comes from the nature of the firm's operating activities
absolute priority rule (APR)
the rule establishing priority of claims in liquidation
interest tax shield
the tax savings attained by a firm from the tax deductibility of interest expense
Static Theory of Capital Structure
the theory that a firm borrows up to the point where the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress
