Business Finance - Chapter 13 Closed Book Quiz
Which one of the following best defines legal bankruptcy?
A legal proceeding for liquidating or reorganizing a business
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?
Absolute priority rule
Which one of the following will generally receive the highest priority in a bankruptcy liquidation, assuming the absolute priority rule is followed?
Bankruptcy administrative expenses
Which one of the following is the equity risk arising from the daily operations of a firm?
Business risk
Which one of the following statements concerning financial leverage is correct?
Financial leverage magnifies both profits and losses.
Which one of the following is the equity risk arising from the capital structure selected by a firm?
Financial risk
Which one of the following is an example of a direct bankruptcy cost?
Incurring legal fees for the preparation of bankruptcy filings
Which one of the following terms applies to the costs incurred by a firm that is trying to avoid filing for bankruptcy?
Indirect bankruptcy costs
Paying interest reduces the taxes owed by a firm. Which one of the following terms applies to this relationship?
Interest tax shield
Which one of the following is a direct bankruptcy cost?
Legal and accounting fees related to a bankruptcy proceeding
Which one of the following terms refers to the termination of a firm as a going concern?
Liquidation
Which one of the following supports the theory that the value of a firm increases as the firm's level of debt increases
M&M Proposition I with taxes
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?
Reorganization
Which one of the following is the theory that a firm should borrow up to the point where the additional tax benefit from an extra dollar of debt equals the additional costs associated with financial distress from that additional debt?
Static theory of capital structure
Which one of the following statements is the core principle of M&M Proposition I, without taxes?
The capital structure of a firm is totally irrelevant.
Which one of the following statements matches M&M Proposition I without taxes?
The value of a firm is independent of the firm's capital structure.
Which one of the following is minimized when the value of a firm is maximized?
WACC
Which one of the following conditions exists at the point where a firm maximizes its value?
WACC is minimized.
The level of financial risk to which a firm is exposed is dependent on the firm's:
debt-equity ratio
The use of borrowing by an individual to adjust his or her overall exposure to financial leverage is referred to as:
homemade leverage
A prepack:
is the joint filing of both a bankruptcy filing and a creditor-approved reorganization plan.
You are comparing two possible capital structures for a firm. The first option is an all-equity firm. The second option involves the use of $3.8 million of debt. The break-even point between these two financing options occurs when the earnings before interest and taxes (EBIT) are $428,000. Given this, you know that leverage is beneficial to the firm:
whenever EBIT exceeds $428,000.