Chapter 16 -2 Test Bank

Chapter 16 -2 Test Bank - CHAPTER 13 Leverage and Capital...

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Unformatted text preview: CHAPTER 13 Leverage and Capital Structure I. DEFINITIONS Topic: HOMEMADE LEVERAGE 1. The use of personal borrowing to change the overall amount of financial leverage to which the individual is exposed is called: A) Homemade leverage. B) Dividend recapture. C) The weighted average cost of capital. D) Private debt placement. E) A privileged subscription offer. Answer: A Topic: M&M PROPOSITION I 2. The proposition that the value of the firm is independent of its capital structure is called: A) The Capital Asset Pricing Model. B) M&M Proposition I. C) M&M Proposition II. D) The Law of One Price. E) The Efficient Markets Hypothesis. Answer: B Topic: M&M PROPOSITION II 3. The proposition that the cost of equity is a positive linear function of capital structure is called: A) The Capital Asset Pricing Model. B) M&M Proposition I. C) M&M Proposition II. D) The Law of One Price. E) The Efficient Markets Hypothesis. Answer: C Topic: BUSINESS RISK 4. The equity risk derived from the firm's operating activities is called ___________ risk. A) market B) systematic C) extrinsic D) business E) financial Answer: D Topic: FINANCIAL RISK 5. The equity risk derived from the firm's capital structure policy is called ___________ risk. A) market B) systematic C) extrinsic D) business E) financial Answer: E Topic: INTEREST TAX SHIELD 6. The tax savings of the firm derived from the deductibility of interest expense is called the: A) Interest tax shield. B) Depreciable basis. C) Financing umbrella. D) Current yield. E) Tax-loss carryforward savings. Answer: A Topic: UNLEVERED COST OF CAPITAL 7. The unlevered cost of capital is ___________________ . A) the cost of capital for a firm with no equity in its capital structure B) the cost of capital for a firm with no debt in its capital structure C) the interest tax shield times pretax net income D) the cost of preferred stock for a firm with equal parts debt and common stock in its capital structure E) equal to the profit margin for a firm with some debt in its capital structure Answer: B Topic: DIRECT BANKRUPTCY COSTS 8. The explicit costs associated with corporate default, such as legal expenses, are the ___________ of the firm. A) flotation costs B) default beta coefficients C) direct bankruptcy costs D) indirect bankruptcy costs E) default risk premia Answer: C Topic: INDIRECT BANKRUPTCY COSTS 9. The implicit costs associated with corporate default, such as lost sales, are the _______ of the firm. A) flotation costs B) default beta coefficients C) direct bankruptcy costs D) indirect bankruptcy costs E) default risk premia Answer: D Topic: FINANCIAL DISTRESS COSTS 10. The explicit and implicit costs associated with corporate default are the ___________ of the firm....
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This note was uploaded on 05/10/2011 for the course FIN 3716 taught by Professor Fang during the Spring '10 term at LSU.

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Chapter 16 -2 Test Bank - CHAPTER 13 Leverage and Capital...

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