Chap. 12 homework

Chap. 12 homework - CHAPTER 12 CAPITAL STRUCTURE AND...

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(Difficulty: E = Easy, M = Medium, and T = Tough) Business risk Diff: E 1. Which of the following factors would affect a company’s business risk? a. The level of uncertainty regarding the demand for its product. b. The degree of operating leverage. c. The amount of debt in its capital structure. d. Statements a and b are correct. e. All of the statements above are correct. Business and financial risk Diff: E 2. Which of the following statements is most correct? a. A firm’s business risk is solely determined by the financial characteristics of its industry. b. The factors that affect a firm’s business risk are determined partly by industry characteristics and partly by economic conditions. Unfortunately, these and other factors that affect a firm’s business risk are not subject to any degree of managerial control. c. One of the benefits to a firm of being at or near its target capital structure is that financial flexibility becomes much less important. d. The firm’s financial risk may have both market risk and diversifiable risk components. e. None of the statements above is correct. Optimal capital structure Diff: E 3. From the information below, select the optimal capital structure for Minnow Entertainment Company. a. Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50. b. Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90. c. Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20. d. Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40. e. Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00. Optimal capital structure Diff: E 4. Which of the following statements best describes the optimal capital structure? a. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company’s earnings per share (EPS). b. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company’s stock price. c. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company’s weighted average cost of capital (WACC). d. Statements a and b are correct. e. Statements b and c are correct. CHAPTER 12 CAPITAL STRUCTURE AND LEVERAGE 1
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Leverage and capital structure Diff: E 5. Which of the following factors is likely to encourage a corporation to increase the proportion of debt in its capital structure? a. An increase in the corporate tax rate. b. An increase in the personal tax rate. c. An increase in the company’s degree of operating leverage. d. The company’s assets become less liquid. e. An increase in expected bankruptcy costs. Leverage and capital structure Diff: E 6. Which of the following would increase the likelihood that a company would increase its debt ratio in its capital structure? a. An increase in costs incurred when filing for bankruptcy.
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Chap. 12 homework - CHAPTER 12 CAPITAL STRUCTURE AND...

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