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Unformatted text preview: Chapter 12--Capital Structure Chapter 12--Capital Structure Student: ___________________________________________________________________________ 1. The optimal capital structure is that capital structure which strikes a balance between risk and return such that the firm's stock price is maximized. True False 2. Business risk will not affect a firm's beta, because beta is determined by the market and thus is outside the control of the firm. True False 3. If a firm uses no debt, the uncertainty inherent in projections of future returns on equity can be described as business risk. True False 4. The ability of a firm to raise sufficient capital on competitive terms under adverse conditions in order to sustain steady operations is referred to as financial flexibility. True False 5. As long as a firm is near its target capital structure it will not have to concern itself with financial flexibility. True False 6. The degree of financial risk is the single most important determinant of a firm's capital structure. True False 7. Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient. True False 8. Financial leverage affects both EPS and EBIT, while operating leverage only affects EBIT. True False 9. The management of a firm can control the degree of total leverage to some extent. True False 10. Since the degree of total leverage is equal to the degree of operating leverage times the degree of financial leverage, the degree of total leverage must always be greater than or equal to positive 1.0. True False 11. The central result from the work of Miller and Modigliani (MM) and subsequent researchers, is that it is now possible to precisely identify a firm's optimal capital structure. True False 12. Because creditors can foresee, to at least some extent, the costs of bankruptcy, they charge an interest rate that has a premium built into it to compensate for the present value of bankruptcy costs. True False 13. According to MM, in a world without taxes, the optimal capital structure for a firm should approach 100 percent debt financing. True False 14. You are the president of a small, publicly traded corporation. Since you believe that your firm's stock price is temporarily depressed, all additional capital funds required during the current year will be raised using debt. Thus, the appropriate marginal cost of capital for the current year is the after-tax cost of debt. True False 15. One of the implications of signaling theory for capital structure decisions is that firms should normally seek to maintain a reserve borrowing capacity....
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This note was uploaded on 01/18/2011 for the course FIN 3604 taught by Professor Patterson during the Spring '10 term at University of South Florida.
- Spring '10