test12 - Chapter 12Capital Structure MULTIPLE CHOICE 1. The...

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Unformatted text preview: Chapter 12Capital Structure MULTIPLE CHOICE 1. The uncertainty caused by the variability of a firms cash flows is called . . . a. financial risk b. business risk c. financial leverage d. none of the above ANS: B DIF: E REF: 12.2 The Modigliani & Miller Capital Structure Irrelevance Propositions 2. Which of the following is considered an indirect cost of bankruptcy? a. document printing expenses b. professional fees paid to lawyers c. loss of key employees d. none of the above ANS: C DIF: E REF: 12.4 The Agency Cost/Tax Shield Trade-Off Model of Corporate Leverage 3. Which of the following is considered a direct cost of bankruptcy? a. diversion of managements time b. constrained capital investment spending c. lost sales d. none of the above ANS: D DIF: E REF: 12.4 The Agency Cost/Tax Shield Trade-Off Model of Corporate Leverage 4. A situation where shareholders refuse financing a good investment, because they think that only the bondholders will benefit will lead to . . . a. asset substitution b. underinvestment c. overinvestment d. none of the above ANS: B DIF: E REF: 12.4 The Agency Cost/Tax Shield Trade-Off Model of Corporate Leverage 5. The proposition that the market value of the firm is independent of its capital structure is called . . . a. M&M proposition I b. M&M proposition II c. the capital asset pricing model d. none of the above ANS: A DIF: E REF: 12.2 The Modigliani & Miller Capital Structure Irrelevance Propositions NARRBEGIN: Bavarian Brew Bavarian Brew Bavarian Brew, an unlevered firm, has an expected EBIT of $500,000. The required return on assets for the firms assets is 10%. The company has 250,000 shares outstanding. The company is considering raising $1 million in debt with a required return of 6% and would use the proceeds to repurchase outstanding stock. NARREND 6. What is the value of Bavarian Brew before restructuring? Assume no corporate taxes. a. $500,000 b. $5,000,000 c. $1,000,000 d. $3,300,000 ANS: B $500,000/.10 = $5,000,000 DIF: E REF: 12.2 The Modigliani & Miller Capital Structure Irrelevance Propositions NAR: Bavarian Brew 7. What is the value of Bavarian Brew before restructuring? Assume a corporate tax rate of 34%. a. $5,000,000 b. $500,000 c. $3,300,000 d. $1,000,000 ANS: C 5000,000(1-.34)/.10 = $3,300,000 DIF: E REF: 12.2 The Modigliani & Miller Capital Structure Irrelevance Propositions NAR: Bavarian Brew 8. What is the value of Bavarian Brew after restructuring. Assume no corporate taxes. a. $3,300,000 b. $5,000,000 c. $500,000 d. $1,000,000 ANS: B 500,000/.10 + 0 = $5,000,000 DIF: E REF: 12.2 The Modigliani & Miller Capital Structure Irrelevance Propositions NAR: Bavarian Brew 9. What is the value of Bavarian Brew after restructuring? Assume corporate taxes of 34%....
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This note was uploaded on 03/18/2012 for the course FINA 3383 taught by Professor Lovell during the Fall '10 term at Texas Pan American.

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test12 - Chapter 12Capital Structure MULTIPLE CHOICE 1. The...

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