Fin 3403 ch 16
which of the following are correct in relation to MM proposition 2 with no taxes
1,2
a firm may file for ch 11 bankruptcy when:
1,2,3
the interest tax shield has no value when a firm has a
1,3,4
which of the following states that the value of a firm is unrelated to the firms capital structure?
MM proposition 1
the present value of the interest tax shield is expressed as
TcxD
which of the following statements related to chapter 7 bankruptcy is correct?
Under ch 7 bankruptcy, a trustee will assume control of the firms assets until those assets can be liquidated
MM proposition 2 is the proposition that
a firms cost of equity is a linear function with a slope equal to Ra-Ro
MM propoisiton 1 with tax supports the theory that
a firms weighted average cost of capital decreases as the firms debt to equity ratio increases
the unrelated cost of capital refers to the cost of capital for an
all equity firm
which one of the following stamens is correct with respect to the relationship between a levered and unlevered capital structure? assume there are no taxes
at the break even point, there is no advantage to debt
which one of the following is legal proceeding under which an insolvent firm can be reorganized?
bankruptcy
which one of the following is the equity risk that is most related to the daily operations of a firm
business risk
the optimal capital structure has been achieved when the
debt equity ratio results in the lowest possible weighted average cost of capital
based on MM prop 2 with taxes, the weighted average costs of capital
decreases as the debt equity ratio increases
the explicit costs as legal and administrative expenses, associated with corporate default are classified as ___ costs
direct bankruptcy
the static theory of capital structure advocates that the optimal capital structure of a firm
equates the tax savings from an additional dollar of debt to the increased bankruptcy costs related to that additional dollar of debt
which one of the following is the equity risk related to a firms capital structure policy
financial risk
you have computed th break even point between a levered an unlevered capital structure, assume there are no taxes, at the break even level, the
firm is just earning enough to pay the cost of its debt
the business risk of a firm
has a positive relationship with the firms costs of equity
MM proposition 2 with taxes:
has the same general implications of MM proposition 2 without the taxes
which one of the following makes the capital structure of a firm irrelevant?
homemade leverage
the costs incurred by a business in a effort to avoid bankruptcy are classified as
indirect bankruptcy
butter and jelly reduced its taxes last year by 350 by increasing its interest expense by 1000, which of the following terms describes these savings
interest tax shield
which form of financing do firms prefer to use first according to the pecking order theory
internal funds
a firm is technically insolvent when
it is unable to meet its financial obligations
a business firm ceases to exist as a going concern as a result of which of the following?
liquidation
which one of the following has the greatest tendency to increase the percentage included in the optimal capital structure of the firm
low probabilities of financial distress
a firm should select the capital structure that:
maximizes the value of the firm
the capital structure that maximizes the value of a firm also
minimizes the cost of capital
which one of the following states that a firms cost of equity is directly and proportionately related to the firms capital structure?
mm proposition 2
the concept of homemade leverage is most associated with:
mm proposition1 no tax
which one of the following is a direct bankruptcy cost?
paying an outside accountant to prepare bankruptcy reports
which of the following will generally have the highest priority when assets are distributed during bankruptcy
payment of employee wages
The bankruptcy abuse prevention and consumer protection act of 2005:
permits key employee retention plans only if an employee has another job offer.
edwards farm products
reorganization
AA tours i comparing two capital structures
select the unlettered option since the ebit is less than the break even level
Jessica invested in quarto stock, when the firm was unlevered
sell some shares of quarto stock and loan out the sale proceeds
homemade leverage is
the borrowing or lending of money by individual shareholders as means of adjusting their level of financial leverage
MM proposition 1 with no tax supports the argument that:
the debt equity ratio of a firm is completely irrelevant
the interest tax shield is a key reason why
the net cost of a debt to a firm is generally less than the cost of equity
the proposition that a firm borrows up to the point where the magical benefit of interest tax shield is equal to the marginal expense is called:
the static theory of capital structure
the basic lesson of MM theory is that they value of a firm is dependent upon
the total cash flow of the firm
MM proposition 1 with tax is based on the concept that
the value of a firm increases as the firms debt increases because of the tax shield
bankruptcy
transfers value from shareholders to bondholders
corporations in the US tend to
underutilize debt
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
in general, the capital structures used by US firms
vary significantly across industries
the value of a firm is maximized when the
weighted average costs of capital is minimized
the absolute priority rule determines
which parties recieve payment first in bankruptcy proceeding
the optimal capital structure
will vary over time as taxes and market conditions change
which of the following statements related to financial risk are correct?
1,2,3
by definition, which of the following costs are included in the term "financial distress costs"
1,2,3,4
which of the following are correct according to the pecking order theory
1,2,4