Advanced Corp. Finance Chapter 16 Quiz

__ risk is the type of equity risk related to a firm's capital structure policy

Financial

According to __, the value of a company is unrelated to its capital structure

M&M Proposition I, no tax

according to __, the cost of equity capital is directly and proportionally related to capital structure

M&M Proposition II

The present value of the interest tax shield is expressed as:

TcD.

The interest tax shield is a key reason why:

The net cost of debt is generally less than the cost of equity

Which one of the following statements related to chapter 7 bankruptcy is correct?

Under a chapter 7 bankruptcy, a trustee will assume control of the company's assets until those assets can be liquidated.

In general, the capital structures of U.S. firms:

Vary significantly across industries

The value of a firm is maximized when the:

Weighted average cost of capital is minimized

_ risk is the type of equity risk that is most related to the daily operations of a firm

business risk

According to pecking-order theory:

companies stockpile internally generated cash

The optimal capital structure has been achieved when

debt-equity ratio results in the lowest possible weighted average cost of capital

According to the static theory of capital structure, the optimal capital structure for a company:

equates marginal tax savings from additional debt to the marginal increased bankruptcy costs of that debt

In an effort to avoid bankruptcy, a firm may incur certain costs, called ___ costs

indirect bankruptcy

According to the pecking-order theory, firms prefer to use ___ before any other form of financing

internal funds

The business risk of a company:

is positively related to the company's cost of equity

The capital structure that maximizes the value of a company also:

minimizes the cost of capital

Wagner resources was unable to meet its financial obligations. Its creditors forced it into using legal proceedings to restructure itself so that it could continue as a viable business. The process this company underwent is known as a:

reorganization

Which one of the following statements is accurate?

the optimal capital structure maximizes shareholder value

According to ___, a company borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs

the static theory of capital structure

M&M Proposition I with tax implies that the:

weight average cost of capital decreases as the debt-equity ratio increases