IFM10 Ch 15 Test Bank - CHAPTER 15 CAPITAL STRUCTURE...

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CHAPTER 15 CAPITAL STRUCTURE DECISIONS: PART I (Difficulty: E = Easy, M = Medium, T = Tough) True-False Easy: (15.1) Bankruptcy costs Answer: a Diff: E 1 . Because creditors can foresee, to at least some extent, the costs of bankruptcy, they charge a higher rate of interest to compensate for the present value of bankruptcy costs. a. True b. False (15.1) Business risk Answer: b Diff: E 2 . The firm's business risk is largely determined by the financial characteristics of its industry. a. True b. False (15.2) Financial risk Answer: a Diff: E 3 . 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 (15.2) Financial risk Answer: a Diff: E 4 . The firm's financial risk may have both market risk and diversifiable risk components. a. True b. False (15.2) Financial risk Answer: b Diff: E 5 . A firm’s capital structure can never affect its free cash flows. a. True b. False (15.2) Financial leverage Answer: a Diff: E 6 . Whenever a firm goes into debt, it is using financial leverage. a. True b. False Chapter 15: Capital Structure Decisions: Part I Page 1
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Answer: a Diff: E 7 . If a firm utilizes debt financing, a decrease in earnings before interest and taxes (EBIT) will result in a more than proportionate decrease in earnings per share. a. True b. False (15.2) Use of financial leverage Answer: b Diff: E 8 . The graphical probability distribution of net income, when financial leverage is used, would tend to be more peaked than a distribution where no leverage is present, other things held constant. a. True b. False (15.2) Financial leverage Answer: b Diff: E 9 . Firm A has a higher degree of business risk than Firm B. Firm A can offset this by using less financial leverage. Therefore, the variability of both firms' expected EBITs could actually be identical. a. True b. False (15.2) Operating and financial leverage Answer: b Diff: E 10 . Financial leverage affects both EPS and EBIT, while operating leverage only affects EBIT. a. True b. False (15.3) Trade-off theory Answer: a Diff: E 11 . The trade-off theory tells us that the capital structure decision involves a tradeoff between the costs of debt financing and the benefits of debt financing. a. True b. False Medium: (15.2) Business risk Answer: b Diff: M 12 . Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk . a. True b. False (15.2) Operating and financial leverage Answer: a Diff: M 13 . Two firms could have identical financial and operating leverage, yet have different degrees of risk as measured by the variability of EPS. a. True
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IFM10 Ch 15 Test Bank - CHAPTER 15 CAPITAL STRUCTURE...

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