finance ch 16

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. IV. A firm's capital structure is dictated by its need for external financing.

The present value of the interest tax shield is expressed as:

Tc × D.

The unlevered cost of capital refers to the cost of capital for a(n):

all-equity firm.

The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as _____ costs.

direct bankruptcy

The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs

indirect bankruptcy

Butter & Jelly reduced its taxes last year by $350 by increasing its interest expense by $1,000. Which of the following terms is used to describe this tax savings?

interest tax shield

Which form of financing do firms prefer to use first according to the pecking-order theory?

internal funds

Which one of the following has the greatest tendency to increase the percentage of debt included in the optimal capital structure of a firm?

low probabilities of financial distress

A firm should select the capital structure that:

maximizes the value of the firm.

M & M Proposition I with no tax supports the argument that:

the debt-equity ratio of a firm is completely irrelevant.

The proposition that a firm borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs is called:

the static theory of capital structure.

M & M Proposition I with taxes is based on the concept that:

the value of a firm increases as the firm's debt increases because of the interest tax shield.

Bankruptcy:

transfers value from shareholders to bondholders.

If a firm has the optimal amount of debt, then the:

value of the levered firm will exceed the value of the firm if it were unlevered.

The value of a firm is maximized when the:

weighted average cost of capital is minimized.