Capital Structure and Leverage 3

Capital Structure and Leverage 3 - A. B. C. D. E. 3. Which...

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Old Exam Questions - Capital Structure and Leverage Page 3 of 31 Pages A. If a firm un-expectantly increases the amount of debt in its capital structure, but is not required to refinance its existing debt, then there may be a transfer of wealth form existing debtholders to existing shareholders. B. The possibility of bankruptcy has a negative effect on the value of the firm because a bankruptcy has real costs associated with it. C. Modigliani and Miller stated that the value of the firm, when including the effect of corporate income taxes, can be expressed as V L = V U + (T C )(D). D. If a firm were facing the possibility of immediate bankruptcy, then rational equity investors would prefer the company to cut its dividend payments to conserve cash. E. For an all equity firm, as earnings before interest and taxes (EBIT) increase, the earnings per share (EPS) will increase by a higher percent. 3.
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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