CF Chap 16

The firm's capital structure refers to the:

• A) mix of current and fixed assets a firm holds.
• B) amount of capital invested in the firm.
• C) amount of dividends a firm pays.
• D) mix of debt and equity used to finance the firm's assets.
• E) amount of cash versus receivables the firm holds

A general rule for managers to follow is to set the firm's capital structure such that the firm's:

• A) size is maximized.
• B) value is maximized.
• C) bondholders are secured.
• D) suppliers of raw materials are satisfied.
• E) dividend payout is maximized

A manager should attempt to maximize the value of the firm by changing the capital structure if and only if the value of the firm increases:

• A) as a result of the change.
• B) to the sole benefit of the managers.
• C) to the sole benefit of the debtholders.
• D) while also decreasing shareholder value.
• E) while holding stockholder value constant

A firm should always select the capital structure which:

• A) produces the highest cost of capital.
• B) maximizes the value of the firm.
• C) minimizes taxes.
• D) maximizes current dividends.
• E) has no debt.

Bryan invested in Bryco stock when the firm was financed solely with equity. The firm now has a debt-equity ratio of .3. To maintain the same level of leverage he originally had, Bryan needs to:

• A) borrow some money and purchase additional shares of Bryco stock.
• B) maintain his current position in Bryco stock.
• C) sell some shares of Bryco stock and hold the proceeds in cash.
• D) sell some shares of Bryco stock and loan out the proceeds.
• E) sell half of his Bryco stock and invest the proceeds in risk-free securities

In the absence of taxes, the capital structure chosen by a firm doesn't really matter because of:

• A) taxes.
• B) the interest tax shield.
• C) the relationship between dividends and earnings per share.
• D) the effects of leverage on the cost of equity.
• E) homemade leverage

MM Proposition I with no tax supports the argument that:

• A) business risk determines the return on assets.
• B) the cost of equity rises as leverage rises.
• C) it is completely irrelevant how a firm arranges its finances.
• D) a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.
• E) financial risk is determined by the debt-equity ratio

The proposition that the value of a levered firm is equal to the value of an unlevered firm is known as:

• A) MM Proposition I with no tax.
• B) MM Proposition II with no tax.
• C) MM Proposition I with tax.
• D) MM Proposition II with tax.
• E) both MM I with and without tax

The concept of homemade leverage is most associated with:

• A) MM Proposition I with no tax.
• B) MM Proposition II with no tax.
• C) MM Proposition I with tax.
• D) MM Proposition II with tax.
• E) no MM Proposition

A levered firm is a company that has:

• A) accounts payable as its only liability.
• B) some debt in its capital structure.
• C) an all-equity capital structure.
• D) a tax loss carry forward.
• E) taxable income