ch12 - CHAPTER 12CAPITAL STRUCTURE TRUE/FALSE 1. The...

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C HAPTER 12—C APITAL S TRUCTURE TRUE/FALSE 1. The optimal capital structure is that capital structure which strikes a balance between risk and return such that the firm's stock price is maximized. ANS: T DIF: Easy TOP: Optimal capital structure 2. Business risk will not affect a firm's beta, because beta is determined by the market and thus is outside the control of the firm. ANS: F DIF: Easy TOP: Business risk 3. If a firm uses no debt, the uncertainty inherent in projections of future returns on equity can be described as business risk. ANS: T DIF: Easy TOP: Business risk 4. The ability of a firm to raise sufficient capital on competitive terms under adverse conditions in order to sustain steady operations is referred to as financial flexibility. ANS: T DIF: Easy TOP: Financial flexibility 5. As long as a firm is near its target capital structure it will not have to concern itself with financial flexibility. ANS: F DIF: Easy TOP: Financial flexibility 6. The degree of financial risk is the single most important determinant of a firm's capital structure. ANS: F DIF: Easy TOP: Financial risk 7. Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient. ANS: T DIF: Easy TOP: Financial leverage 8. Financial leverage affects both EPS and EBIT, while operating leverage only affects EBIT. ANS: F DIF: Easy TOP: Operating and financial leverage 9. The management of a firm can control the degree of total leverage to some extent. ANS: T DIF: Easy TOP: DTL 10. Since the degree of total leverage is equal to the degree of operating leverage times the degree of financial leverage, the degree of total leverage must always be greater than or equal to positive 1.0. ANS: F DIF: Easy TOP: DTL 11. The central result from the work of Miller and Modigliani (MM) and subsequent researchers, is that it is now possible to precisely identify a firm's optimal capital structure. ANS: F DIF: Easy TOP: MM and optimal capital structure
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27 Chapter 12      Capital Structure 12. Because creditors can foresee, to at least some extent, the costs of bankruptcy, they charge an interest rate that has a premium built into it to compensate for the present value of bankruptcy costs. ANS: T DIF: Easy TOP: Bankruptcy costs 13. According to MM, in a world without taxes, the optimal capital structure for a firm should approach 100 percent debt financing. ANS: F DIF: Easy TOP: MM and optimal capital structure 14. You are the president of a small, publicly traded corporation. Since you believe that your firm's stock price is temporarily depressed, all additional capital funds required during the current year will be raised using debt. Thus, the appropriate marginal cost of capital for the current year is the after-tax cost of debt. ANS: F
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This note was uploaded on 06/13/2011 for the course ACCT 2292 taught by Professor Wolverton during the Spring '08 term at Troy.

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ch12 - CHAPTER 12CAPITAL STRUCTURE TRUE/FALSE 1. The...

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