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 . M&M Proposition I. c. M&M Proposition II. d. the law of one price. e. the efficient markets hypothesis. SECTION: 17.3 TOPIC: M&M PROPOSITION I 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: SECTION: 17.3 TOPIC: M&M PROPOSITION II 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. SECTION: 17.3 TOPIC: BUSINESS RISK TYPE: DEFINITIONS 5. The equity risk derived from a firm's capital structure policy is called _____ risk. 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. SECTION: 17.5 TOPIC: DIRECT BANKRUPTCY COSTS TYPE: DEFINITIONS
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