chapter 13

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

Business risk

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

Peter's Tools recently defaulted on a bank loan. To avoid a bankruptcy proceeding, the bank agreed to a composition. This composition would do which one of the following

Reduce the amount of the loan payments so Peter's can pay on time

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

Which one of the following is minimized when the value of a firm is maximized?

WACC

Which one of the following conditions exists at the point where a firm maximizes its value?

WACC is minimized

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

homemade leverage

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

whenever EBIT exceeds $428,000.

Which one of the following 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?

Static theory of capital structure

Which one of the following is correct based on the static theory of capital structure

The costs of financial distress decrease the value of a firm