chap017 - Chapter 017 Financial Leverage and Capital...

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Chapter 017 Financial Leverage and Capital Structure Policy Multiple Choice Questions 1. The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called: A . homemade leverage. b. restructured leverage. c. the weighted average cost of capital. d. restructured private debt. e. personal offset. SECTION: 17.2 TOPIC: HOMEMADE LEVERAGE TYPE: DEFINITIONS 2. The proposition that the value of a firm is independent of the firm's capital structure is called: a. the capital asset pricing model. B d. the law of one price. e. the efficient markets hypothesis. SECTION: 17.3 TYPE: DEFINITIONS 3. The proposition that a firm's cost of equity capital is a positive linear function of the firm's capital structure is called: a. the capital asset pricing model. C d. the law of one price. e. the efficient markets hypothesis. SECTION: 17.3 TYPE: DEFINITIONS 17-1
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Chapter 017 Financial Leverage and Capital Structure Policy 4. The equity risk derived from the nature of a firm's operating activities is called _____ risk. a. market b. systematic c. extrinsic D . business e. financial SECTION: 17.3 TOPIC: BUSINESS RISK TYPE: DEFINITIONS 5. The equity risk derived from a firm's capital structure policy is called _____ risk. a. market b. systematic c. extrinsic d. business E . financial SECTION: 17.3 TOPIC: FINANCIAL RISK TYPE: DEFINITIONS 6. The tax savings 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. SECTION: 17.4 TOPIC: INTEREST TAX SHIELD TYPE: DEFINITIONS 17-2
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Chapter 017 Financial Leverage and Capital Structure Policy 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 that has no debt obligations. c. equal to the interest tax shield multiplied by the pretax net income. d. equal to the cost of preferred stock for a firm with no debt. e. equal to the profit margin for a firm with some debt in its capital structure. SECTION: 17.4 TOPIC: UNLEVERED COST OF CAPITAL TYPE: DEFINITIONS 8. The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as _____ costs. a. flotation b. beta conversion C . direct bankruptcy d. indirect bankruptcy e. unlevered SECTION: 17.5 TOPIC: DIRECT BANKRUPTCY COSTS TYPE: DEFINITIONS 9. The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as _____ costs. a. flotation b. direct bankruptcy C . indirect bankruptcy d. financial solvency e. capital structure SECTION: 17.5 TOPIC: INDIRECT BANKRUPTCY COSTS TYPE: DEFINITIONS 17-3
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Chapter 017 Financial Leverage and Capital Structure Policy 10. The combined explicit and implicit costs associated with corporate default are referred to as the _____ costs. a. flotation
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This note was uploaded on 05/21/2011 for the course ECO 3203 taught by Professor Staff during the Spring '08 term at University of South Florida.

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chap017 - Chapter 017 Financial Leverage and Capital...

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