Finance (learnsmart)

an investor who invests in the stock of a levered firm rather than in an all equity firm will require

a higher expected return

financial risk

an investor who buys the common stock of a levered firm is subject to a more risk due to the addition of

Financial Leverage

describes capital structure when debt is used to finance assets

which of the following industries tend to have a low leverage

drugs and computers

the optimal level of debt in the presence of corporate taxes and bankruptcy costs occurs at the point at which the present value of distress costs ----- the present value of the tax shield benefits

equals

a firms capital structure refers to

firms mix of debt and equity

a beneficial rule to follow is to set the firms capital structure so that

firms value is maximized

An individual can duplicate a levered firm firm through a strategy called --------- leverage where the investor uses his own funds plus borrowed funds to buy stocks

homemade

if the degree of leverage increases, the cost of debt will

increase

customers refusing to buy GM cars when the company filed for chapter 11 bankruptcy for fear of not being able to get service on the cars in the future, is an example of ------- costs of financial distress

indirect

the tax savings attained by the firm from the tax deductibility of interest expense is called

interest tax shield

Capital restructuring includes...

issuing more debt, and more equity, issuing debt and repurchasing equity.

the value of a levered firm in MM proposition I with corporate taxes equals the value of an all equity firm

plus the tax rate times the value of debt

a corporation gains no value from an interest tax shield if which of the following are true

the corporation is an all equity firm, the corporation has no debt, corporate tax rates are zero

which of the following will apply when the 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 costs of financial distress

M&M proposition I states if the assets and operations for two firms are the same then

the value of the two firms are equal, how the firms are financed are irrelevant

what is the expression for the value of a levered firm in the presence of corporate taxes

value of levered firms=value of unlevered firms+tax benefit of debt