Q16 - University of Houston-Victoria FIN 6352 Financial...

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FIN 6352 Financial Management FMQuiz16 Dr. Xavier Garza Gómez University of Houston-Victoria FIN 6352 Financial Management Review Quiz for Chapter 16 - Capital Structure Decisions True-False 1. Financial risk refers to the extra risk stockholders bear as a result of the use of debt as compared with the risk they would bear if no debt were used. a. True b. False 2. The firm's financial risk may have both market risk and diversifiable risk components. a. True b. False 3. A firm’s capital structure can never affect its free cash flows. a. True b. False Multiple Choice: Concepts 4. Ridgefield Enterprises has total assets of $300 million. The company currently has no debt in its capital structure. The company’s basic earning power is 15 percent. The company is contemplating a recapita- lization where it will issue debt at 10 percent and use the proceeds to buy back shares of the company’s common stock. If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain the same. Which of the following will occur as a re- sult of the recapitalization? a. The company’s ROA will decline. b. The company’s ROE will increase. c. The company’s basic earning power will decline. d. Answers a and b are correct. e. All of the above answers are correct. 5. Which of the following events is likely to encourage a company to raise its target debt ratio? a. An increase in the corporate tax rate. b. An increase in the personal tax rate. c. An increase in the company’s operating leverage. d. Statements a and c are correct. e. All of the statements above are correct.
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FIN 6352 Financial Management FMQuiz16 Dr. Xavier Garza Gómez 6. Company A and Company B have the same total assets, operating income (EBIT), tax rate, and business risk. Company A, however, has a much higher debt ratio than Company B. Company A’s basic earning power (BEP) exceeds its cost of debt financing (r d ). Which of the following statements is most cor- rect? a. Company A has a higher return on assets (ROA) than Company B. b. Company A has a higher times interest earned (TIE) ratio than Company B. c. Company A has a higher return on equity (ROE) than Company B, and its risk, as measured by the standard deviation of ROE, is also higher than Company B’s. d.
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Q16 - University of Houston-Victoria FIN 6352 Financial...

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