4211 Quiz 5

which of the following does a firm consider in the choice of securities issued

-tax consequences -transaction costs -whether chosen security will have fair price in the market

This is NOT one of MM set of conditions referred to as perfect capital markets

All investors hold the efficient portfolio of assets.

Following the absolute priority rule, what is the correct order for post-bankruptcy payments?

DIP, Senior, Junior, Equity

which transaction has the most asymmetric information between counterparties?

buying a used car

a bankruptcy process is complex, time-consuming, and costly. the costs of bankruptcy include

costs of hiring legal experts, appraisers, and auctioneers

A firm's _____ ratio is the function of the firm's total value that corresponds to debt

debt to value

t/f: debt overhang is defined as a situation in which a firm has so much debt that it invests in negative npv projects in order to do something with the debt proceeds

false

If the only market imperfection is the existence of taxes, then a firm's stock price must _____ upon the announcement of a new debt issuance

go up

firms in industries such as biotech tend to have _____ distress costs because of a small proportion of tangible assets and volatile cash flows

high

when investors use leverage in their own portfolios to adjust the leverage choice made by the firm, it is referred to as

homemade leverage

leverage can _____ a firm's expected earnings per share, but does not necessarily increase the share price

increase

in a setting where there is no risk that a firm will default, leverage_____ the risk of equity

increases

it is not correct to discount the cash flows of a levered firm with the cost of equity of the unlevered firm because

leverage increases the risk of the equity of the firm

equity in a firm with debt is called

levered equity

the optimal capital structure depends on _____ such as taxes, distress costs, and agency costs

market imperfections

managerial entrenchment means that managers _____ and run the firm for their own best interests

may face little threat of being fired

investment cash flows are independent of financing choices in a

perfect capital market

one of the factors that determine the present value of financial distress costs is

probability of financial distress

the peking order hypothesis states that managers will have a preference to fund investment by using _____, then _____, and _____ as a last resort

retained earnings, debt, equity

which security has the lowest direct issuance costs?

standard bonds

t/f: equity-debt holder conflicts are more likely to arise if the risk of financial distress is high

true

t/f: relative to an owner managed firm, a publicly traded firm has higher agency costs and more efficient risk bearing

true

a firm's overall cost of capital that is a blend of the costs of the different sources of capital is known as the firm's

weighted average cost of capital

According to Modigliani and Miller

with perfect capital markets, the total value of a firm should not depend on its capital structure