Finance Ch. 13

Which one of the following best defines legal bankruptcy?

A legal proceeding for liquidating or reorganizing a business

Which one of the following is the equity risk arising from the daily operations of a firm?

Business risk

The level of financial risk to which a firm is exposed is dependent on the firm's:

Debt-equity ratio

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 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 supports the theory that the value of a firm increases as the firm's level of debt increases?

M&M Proposition I with taxes

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.