TIF_ch15 - Test Bank Chapter 15 CAPITAL STRUCTURE POLICY...

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Test Bank Chapter 15: CAPITAL STRUCTURE POLICY EFS I. True or False (Definitions and Concepts) F 1. A firm’s mix of financing methods is called its capital budget. (FALSE: Should be capital structure instead of capital budget.) T 2. For most capital structure models, the required returns on equity and debt (r e and r d , respectively) depend on the amount of debt. T 3. An arbitrage argument can be used to show that if two firms have identical operating profitability but different capital structures, then buying and selling among investors will ensure that the two firms have equal market values. F 4. Tax differences paid on equity and debt gives rise to the personal tax view of capital structure (FALSE: Should be corporate tax view of capital structure instead of personal tax view of capital structure.) T 5. According to the corporate tax view of capital structure, the expected after-tax cash flows to investors increase with leverage because the government will collect fewer tax dollars. F 6. Investors with a high marginal income tax rate may find debt securities more attractive. (FALSE: Should be less attractive instead of more attractive.) F 7. Tax-exempt investors may find debt securities less attractive than other investors. (FALSE: Should be more attractive instead of less attractive.) T 8. With tax asymmetry, an all-equity firm can increase its value by issuing debt. F 9. The expected costs of financial distress and bankruptcy depend totally on the uniqueness, or degree of specialization, of the firm's assets. (FALSE: Should be depend in part instead of depend totally.) T 10. The difference in personal taxes for equity and debt offsets the corporate tax asymmetry when (1 – T d ) = (1 – T e )(1 – T). F 11. The capital gain tax-timing option raises the effective tax rate on shareholder income. (FALSE: Should be lowers instead raises.) F 12. Agency conflicts between equityholders and debtholders can be minimized by creating contracts without restrictive covenants. (FALSE: Should be with restrictive covenants instead of without restrictive covenants.) T 13. Loss carryforwards and loss carrybacks are sometimes limited, so that some of the corporate tax shield resulting from leverage may be lost during a period financial distress. T 14. The existence of various leverage clienteles mitigates some, but not all, of the arguments in favor of capital structure relevance.
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T 15. All of the views of capital structure, beyond that of a perfect capital market, are based on minimizing the value lost to one or more imperfections. II. Multiple Choice (Definitions and Concepts) a 16. Capital structure is irrelevant in terms of firm value in a perfect capital market environment where there are .
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This note was uploaded on 01/21/2011 for the course ACC 452 taught by Professor Mr.cula during the Spring '10 term at Abraham Baldwin Agricultural College.

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TIF_ch15 - Test Bank Chapter 15 CAPITAL STRUCTURE POLICY...

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