BA - 323 CH 13
Based on M&M Proposition I with corporate taxes, the optimal capitol structure is _____________
100% debt
T or F: Stockholders care most about the dividend maximization of the firm
False
T or F: The legal process of bankruptcy is typically quick and inexpensive
False
the value of a levered firm in M&M Proposition I with corporate taxes equals: the value of an all equity firm ___________________
Plus the tax rate x the value of debt
What is M&M proposition I?
The firms capital structure does NOT impact its value
T or F: It is possible for the present value of distress costs to exceed the present value of tax savings
True
T or F: M&M demonstrated that debt financing is neither better nor worse than equity financing.
True
a firms capitol structure refers to ____________
a firms mix of debt and equity
a beneficial rule to follow is to set the firms capitol structure so that __________
a firms value is maximized
which of the following are direct costs of financial distress?
administrative expenses legal fees
which of the following industries tend to have high leverage?
airlines restaurants
the costs of financial distress depend mostly on how easily the ownership of the firms ___________ can be transferred
assets
financial distress can arise in the form of possible _____________
business failure legal bankruptcy
which two of the following are broad types of costs of financial distress?
direct costs indirect costs
according to proposition I, a firms capital structure choices _______
do not affect the value of a firm
which of the following are examples of firms which filed for bankruptcy for strategic reasons?
dow corning texaco continental airlines johns manville
which of the following industries tend to have a low leverage?
drugs computers
the optimal level of debt in the presence of corporate taxes and bankruptcy costs occur at the point which the present value of distress costs ____________ the present value of the tax shield benefits
equals
_____ is the term that describes the capitol structure when debt is used to finance assets
financial leverage
the equity risk that comes from the financial policy or capitol structure decisions of the firm is known as __________
financial risk
the tax deductibility of interest payment is _____________
good for the firm
if the degree of leverage increases, the cost of debt will __________
increase
which of the following describes a firm that takes advantage of a reorganization?
it is allowed to issue new securities the firm continues to operate the business must have its reorganization approved by its creditors
which of the following is true of the impact of financial leverage?
it magnifies gains and losses
the cost of debt is generally ___________ than the cost of equity
less
what are some examples of indirect financial distress costs?
lost reputation lost sales
the expected return on equity is _______ to leverage
positively related
M&M Proposition II shows that Blank______
the cost of equity rises with leverage
which of the following describe a firm that takes advantage of a reorganization?
the firm continues to operate it is allowed to issue new securities the business must have its reorganization approved by its creditors
the static theory of capitol structure suggests employing debt to the point that its cost equals the cost of____________
the increased probability of bankruptcy
which of the following will apply when a firms debt levels are extremely high?
the possibility of financial distress will become a chronic problem the benefits of debt financing may be more than offset by the cost of financial distress
M&Ms Proposition I states if the assets and operations (left hand side of balance sheet) for two firms are the same then ____________
the value of the two firms is equal how the firms are financed is irrelevant
