FRL 301 Chapter 16 Conceptual
Which one of the following is the equity risk that is most related to the daily operations of a firm? - Market risk - Systematic risk - Extrinsic risk - Business risk - Financial risk
business risk
Which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? Ignore taxes. - At the break-even point, there is no advantage to debt. - The earnings per share will equal zero when EBIT is zero for a levered firm. - The advantages of leverage are inversely related to the level of EBIT. - The use of leverage at any level of EBIT increases the EPS. - EPS are more sensitive to changes in EBIT when a firm is unlevered.
At the break-even point, there is no advantage to debt
Which one of the following states that a firm's cost of equity capital is directly and proportionally related to the firm's capital structure? - Static Theory of capital structure - M&M Proposition I - M&M Proposition II - Homemade leverage - Pecking-order theory
M&M Proposition II
Which one of the following is a direct cost of bankruptcy? - Paying an outside accountant to prepare bankruptcy reports. - Maintaining a debt-equity ratio that is lower than the optimal ratio. - Bypassing a positive NPV project to avoid additional debt. - Firm investing in cash reserves. - Losing a key company employee.
Paying an outside accountant to prepare bankruptcy reports
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. - Direct financial distress costs must equal the present value of the interest tax shield. - Debt-equity ratio is equal to 1. - Value of the firm is equal to VL + TC ×D. - Value of the firm is minimized.
Value of the levered firm will exceed the value of the firm if it were unlevered
The value of a firm is maximized when the: - Cost of equity is maximized. - Tax rate is zero. - Levered cost of capital is maximized. - Weighted average cost of capital is minimized. - Debt-equity ratio is minimized.
weighted average cost of capital is minimized
