TIF_ch16 - Test Bank Chapter 16: MANAGING CAPITAL STRUCTURE...

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Test Bank Chapter 16: MANAGING CAPITAL STRUCTURE EFS I. True or False (Definitions and Concepts) F 1. Financial managers and academics have methods to precisely measure such things as the expected costs of financial distress, agency costs, and the cost of reduced financing flexibility. (FALSE: Should be do not have methods instead of have methods.) T 2. We can understand the main factors that affect a firm's choice of capital structure, but financial theory doesn't tell us precisely how these factors determine a firm's optimal capital structure. T 3. A firm cannot simply adopt the industry average debt ratio, because differences exist among firms in any particular industry with respect to tax position, size, competitive position, operating risk, business prospects, and other factors. F 4. In practice, a firm's bond rating has no bearing on the choice of capital structure. (FALSE: Should be important implications concerning instead of no bearing on.) T 5. The highest four rating categories are known as investment grade ratings. F 6. Bonds in the top three investment grade categories are judged from "favorable" to "unfavorable." (FALSE: Should be "gilt edge." instead of “unfavorable.”) T 7. Once a firm has chosen its target rating, useful guidance can be found by looking at certain key credit statistics for comparable firms whose debt carries the target rating. T 8. A firm in a highly cyclical industry should set higher interest coverage and fixed- charge coverage ratio standards to compensate for the greater operating risk. F 9. Firms in industries with other substantial tax shelter opportunities, such as oil and gas companies (with their depletion allowances) and steel makers (with their depreciation and loss carryforwards), should have higher leverage ratios than firms in other industries. (FALSE: Should be lower leverage ratios instead of higher leverage ratios.) T 10. The tax value of incremental interest deductions varies significantly across industries because of differences in nondebt tax shields. T 11. Firms that use debt financing must generate sufficient income from operations to claim the deductions. F 12. A firm in a noncyclical industry should set lower interest coverage and fixed- charge coverage ratio standards to compensate for the greater operating risk. (FALSE: Should be lower instead of higher.) F 13. Studies show that the behavioral principle is not followed when managers choose their capital structure. (FALSE: Should be is followed instead of is not followed.) F 14. State laws never impose minimum rating standards and other restrictions that bonds must meet to qualify as legal investments for savings banks, trust firms, public pension
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funds, and insurance companies. (FALSE: Should be will and can impose instead of never impose.) T 15. Firms should not blindly follow the industry norm when it comes to choosing the amount of debt used in financing. II. Multiple Choice (Definitions and Concepts)
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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_ch16 - Test Bank Chapter 16: MANAGING CAPITAL STRUCTURE...

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