Chapter 16
According to the Static Theory of Capital Structure, an unprofitable firm with unstable cash flows across many states of the world, such as a startup, might have an optimal debt-to-equity ratio of three
False
According to the Static Theory of Capital Structure, firms lever up to minimize expected distress and bankruptcy costs
False
As the firm's debt-to-equity ratio decreases, its stock beta increases as well
False
If Alpha Company has more business risk than WSB Inc., then its rU will be smaller than WSB's.
False
In M&M Case III, the firm's cost of debt is fixed
False
In M&M case I, the firm's cost of debt is not fixed
False
In a world with no taxes and no bankruptcy, leverage changes the business risk premium contained in rU
False
In a world with no taxes and no bankruptcy, the size of the value pie available to the capital providers changes
False
In a world with no taxes and no bankruptcy, there is a unique capital structure that maximizes value
False
In a world with no taxes and no bankruptcy, this is the firm's cost of equity, rA = (E/V) * rE + (D/V) * rD
False
In a world with no taxes and no bankruptcy, value does change because of the CFO's leverage choice because the DCF denominators change while the numerators remain constant
False
In a world with taxes and bankruptcy, changing leverage does not change the cash flows from assets, therefore the riskiness of those cash flows does not change either.
False
In a world with taxes and bankruptcy, changing the company's capital structure changes the size of the slices of the value pie going to stockholders and bondholders, but not the size of the pie available to both.
False
In a world with taxes and no bankruptcy, changing leverage does not change the riskiness of the cash flows from assets, therefore WACC remains constant
False
In a world with taxes and no bankruptcy, the denominators in the DCF equation do not change when leverage changes
False
In a world with taxes and no bankruptcy, there is not a unique capital structure that maximizes value
False
In a world with taxes and no bankruptcy, you lever up to maximize the slice of the value pie that goes to the stockholders
False
Levering down changes both the right and left hand sides of the balance sheet
False
Levering up means issuing stocks in the primary market then using the proceeds to buy bonds in the secondary market
False
The business risk premium is beta unlevered * riskless rate
False
The compensation for financial risk is (rE-rD) * (D/E) * (1-t) in a world with taxes and no bankruptcy
False
The compensation for financial risk is rU in a world with taxes and no bankruptcy
False
According to the Static Theory of Capital Structure, the expected costs of financial distress and bankruptcy varies across firms and industries, so the optimal leverage choice will vary too
True
An optimal capital structure is all debt when there are no taxes and no bankruptcy
True
As defined in this course, financial distress is when the firm is having difficulty fulfilling its obligations but has not yet entered bankruptcy
True
As the debt-to-equity ratio increases the probability of incurring financial distress costs increases.
True
Because there is volatility in a firm's EBIT across different systematic states of the world, the asset's have a beta that captures business risk
True
If Alpha Company has more business risk than WSB Inc., then its rU will be bigger than WSB's.
True
In a world with no taxes and no bankruptcy, leverage does not change the business risk premium contained in rU.
True
In a world with taxes and bankruptcy, changing the company's capital structure changes the size of the slices of the value pie going to stockholders and bondholder, as well as the size of the pie available to both
True
In a world with taxes and bankruptcy, there is a unique capital structure that minimizes WACC
True
In part, Case II Proposition II states that a firm's cost of debt is not affected by changes in the capital structure
True
Levering down changes the right hand side of the balance sheet but not the left
True
Levering up does not change the assets of the company
True
M&M Case III assumes a world with taxes and bankruptcy
True
M&M Case III assumes a world with taxes, financial distress, and bankruptcy
True
M&M proposition ones focus on value
True
The equity beta measures the business and financial risks
True
The financial risk premium is beta unlevered * market risk premium * D/E
True
The impact of leverage on the cost of equity shows up in M&M propositions twos
True
The unlevered beta captures the systematic risk of the cash flows from assets due to the nature of the firm's business
True
There is a unique optimal structure when there are taxes and bankruptcy
True
There is risk because the firm's EBIT varies across different states of the world that reflect the systematic risk of the assets. The risk is known as business risk
True