Finance Chapter 13

Is the joint filing of both a bankruptcy filing and a creditor-approved reorganization plan

A Prepack:

A firms value and its weighted average cost of capital are inversely related

Assume both corporate taxes and financial distress costs apply to a firm. Given this, the static theory of capital structure illustrates that:

The unlevered firm will have higher EPS at relatively low levels of EBIT

Assume you are comparing two firms that are identical in every aspect, except one is levered and one is unlevered. What statement is correct regarding these two firms?

Reorganization

Greenwood Motels has filed a petition for a bankruptcy but hopes to continue its operations both during and after the bankruptcy process. What term best applies to this situation?

Absolute priority rule

In the process of liquidation, some types of claims receive preference over the claims. What determines which type of claim is paid first?

Cost of equity increases as a firm increases it debt-equity ratio

M&M Proposition II, without taxes, states that the:

Interest tax shield

Paying interest reduces the taxes owed by a firm. What term applies to this relationship?

Reduce the amount of the loan payments so peterboro can pay timely

Peterboro recently defaulted on a bank loan. To avoid a bankruptcy proceeding, the bank agreed to a composition. This composition would do what?

Sell some shares and loan out the sale proceeds

T.L.C. Enterprises just revised its capital structure from a debt-equity ratio of .30 to a debt-equity ratio of .45. The firms shareholders who prefer the old capital structure should:

Debt-equity ratio

The level of financial risk to which a firm is exposed is dependent upon the firms:

Is fixed in terms of its assets

The static theory of capital structure assumes a firm:

Homemade leverage

The use of borrowing by an individual to adjust his or her overall exposure to financial leverage is:

A legal proceeding for liquidating or reorganizing a business

What best defines legal bankruptcy?

WACC is minimized

What conditions exists at the point where a firm maximizes its values?

Legal and accounting fees related to a bankruptcy proceeding

What is a direct bankruptcy cost?

Right granted to creditors to file their own reorganization plan once a firm is in bankruptcy for 18 months

What is a key provision of the Bankruptcy Abuse Prevention and consumer Protection Act of 2005?

Incurring legal fees for the preparation of bankruptcy filings

What is an example of a direct bankruptcy cost?

The risk of equity depends on both the degree of financial leverage and the riskiness of the firms operations

What is an implication of M&M Proposition II, without taxes?

The costs of financial distress decrease the value of a firm

What is correct based on the static theory of capital structure?

Changes in the capital structure of a firm will generally change the firms earnings per share

What is correct concerning financial leverage

Financial leverage magnifies both profits and losses

What is correct concerning financial leverage?

A firm can file for chapter 11 bankruptcy even if the firm is solvent

What is correct?

Bankruptcy courts have "cram-down" powers

What is correct?

The levered value of a firm exceeds the firms unlevered value

What is correctly relate to M&M Proposition I, with taxes

WACC

What is minimized when the value of a firm is maximized?

A firms value is maximized when a firm operates at its optimal debt level

What is related to the static theory of capital structure is correct?

Financial risk

What is the equity risk arising from the capital structure selected by a firm?

Business risk

What is the equity risk arising from the daily operations of a firm?

Static theory of capital structure

What 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?

The capital structure of a firm is totally irrelevant

What statement is the core principle of M&M proposition I, without taxes?

The value of a firm is independent of the firms capital structure

What statement matches M&M propositions I

M&M Proposition I with taxes

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

Indirect bankruptcy costs

What term applies to the costs incurred by a firm which is trying to avoid filing for bankruptcy?

Financial distress costs

What term is inclusive of both direct and indirect bankruptcy costs?

Liquidation

What term refers to the termination of a firm as a going concern?

Bankruptcy administrative expenses

What will generally receive the highest priority in a bankruptcy liquidation, assuming the absolute priority rule is followed?

Increase in the value of the unlevered firm

What will increase the value of a levered firm according to M&M Proposition I, with taxes?

When the firm has a negative net worth

When is a firm insolvent from an accounting perspective?

Whenever EBIT exceeds $428,000

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 debt. The break-even point between these two financing options occurs when the earnings before interest aand taxes (EBIT) are $428,000. Given this, you know that leverage is beneficial to the firm:

M&M Proposition II

what states that a firms cost of equity capital is a positive linear function of the firms capital structure?