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ch16 - ch16 Student Multiple Choice Questions 1 The...

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ch16 Student: _______________________________________________________________________________________ Multiple Choice Questions 1. The explicit costs, such as the legal expenses, associated with corporate default are classified as _____ costs. A. flotation B. beta conversion C. direct bankruptcy D. indirect bankruptcy E. unlevered 2. The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as _____ costs. 3. The explicit and implicit costs associated with corporate default are referred to as the _____ costs of a firm. 4. Indirect costs of financial distress: 5. The legal proceeding for liquidating or reorganizing a firm operating in default is called a: A. tender offer. B. bankruptcy. C. merger. D. takeover. E. proxy fight.
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6. The value of a firm is maximized when the: 7. The optimal capital structure has been achieved when the: 8. In a world with taxes and financial distress, when a firm is operating with the optimal capital structure: (I) the debt-equity ratio will also be optimal. (II) the weighted average cost of capital will be at its minimal point. (III) the required return on assets will be at its maximum point. (IV) the increased benefit from additional debt is equal to the increased bankruptcy costs of that debt. 9. The optimal capital structure will tend to include more debt for firms with: A. the highest depreciation deductions. B. the lowest marginal tax rate. C. substantial tax shields from other sources. D. lower probability of financial distress. E. less taxable income.
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