Chapter 16 Capital Structure

If an investor buys $20,000 worth of stock by investing $11,000 of their own money, how much was borrowed?

$9,000

A firm with no debt in its capital structure is:

unlevered

Which of the following statements are true regarding the effect of financial leverage and the firm's operating earnings (EBI)?

- Financial Leverage increases the slope of the EPS line. - Below the indifference or breakeven point in EBIT, an unlevered capital structure is best. - The rate of return on assets is unaffected by leverage.

Managers should choose the capital structure that will have the ______ firm value.

highest

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

homemade leverage

When an investor borrows money and uses it to purchase stocks is called:

homemade leverage

With ____, an investor is able to replicate a corporation's capital structure by borrowing funds and using those funds along with her own money to buy the company's stock.

homemade leverage

A key assumption of MM Proposition I is that ___.

individuals can borrow as cheaply as corporations.

The effect of financial leverage ______ for all earning levels.

is variable

Homemade ________________ allows an investor to choose any capital structure they want of an unlevered firm.

leverage

After the issuance of debt, an unlevered firm becomes ___.

levered

MM Proposition I does not work with corporate taxes because:

levered firms pay lower taxes than unlevered firms

Stockholders want to _____ the value of the entire firm.

maximize

A company should select the capital structure that:

maximizes the company's value

The expected return on equity is _____ to leverage.

positively related

Volatility or ______ increases for equity holders when leverage increases.

risk

The manager of a firm should change the capital structure if and only if ___.

the change will increase the value of the firm

a firm's capital structure refers to ______________.

the firms mix of debt and equity

A beneficial rule to follow is to set the firm's capital structure so that ___.

the firms value is maximized