Capital Structure pt.1 Review

A firmʹs ________ ratio is the fraction of the firmʹs total value that corresponds to debt.

• debt-to-equity

• equity-to-debt

• debt-to-value

• liability

Equity in a firm with debt is called ________.

• levered equity

• risk-free equity

• unlevered equity

• preferred equity

Which of the following does a firm consider in the choice of securities issued?

• the tax consequences of the chosen security

• the transactions costs of the chosen security

• whether the chosen security will have a fair price in the market

• All of the above are considered.

Investment cash flows are independent of financing choices in a ________.

• market with frictions

• perfect capital market

• setting with frictions in investment returns

• firm with leverage

A project will give a one-time cash flow of $22,000 after one year. If the project risk requires a return of 10%, what is the levered value of the firm with perfect capital markets?

• $20,000

• $16,000

• $24,000

• more information needed

MM Proposition I states that in a perfect capital market the total value of a firm is equal to the market value of the ________ generated by its assets.

• earnings after taxes

• earnings after interest

• cash flows after taxes

• free cash flows

By adding leverage, the returns on a firm are split between debt holders and equity holders, but equity holder risk increases because ________.

• interest payments can be rolled over

• dividends are paid first

• debt and equity have equal priority

• interest payments have first priority

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

• outside debt

• retained earnings

• homemade leverage

• payout ratio

A firm requires an investment of $30,000 and borrows $7500 at 7%. If the return on equity is 18%, what is the firmʹs pretax WACC?

• 7.6%

• 18.3%

• 21.4%

• 15.3%

Leverage can ________ a firmʹs expected earnings per share, but does not necessarily increase the share price.

• decrease

• dilute

• increase

• never change