Question 1

The trade-off theory states that the capital structure decision involves a tradeoff between the costs and benefits of debt financing.

Accepted Answer

True

Question 2

According to MM, in a world without taxes the optimal capital structure for a firm is approximately
100% debt financing.

Accepted Answer

False

Question 3

In a world with no taxes, MM shows that a firm's capital structure does not affect the firm's value.
However, when taxes are considered, MM show a positive relationship between debt and value, i.e., its value rises as its debt is increased.

Accepted Answer

True

Question 4

The bankruptcy risk produces an ambiguous effect on agency costs.

Accepted Answer

The answer of The bankruptcy risk produces an ambiguous effect...

Question 5

The benefit of an interest tax shield is captured by the equity holders, not the debt-holders.

Accepted Answer

The answer of The benefit of an interest tax shield...

Question 6

Different borrowers have different risks of bankruptcy, and bankruptcy is costly to lenders. Therefore, lenders charge higher rates to borrowers judged to be more at risk of going bankrupt.

Accepted Answer

The answer of Different borrowers have different risks of bankruptcy,...

Question 7

A firm's capital structure does not affect its calculated free cash flows, because FCF reflects only operating cash flows.

Accepted Answer

The answer of A firm's capital structure does not affect...

Question 8

The graphical probability distribution of ROE for a firm that uses financial leverage would tend to be more peaked than the distribution if the firm used no leverage, other things held constant.

Accepted Answer

The answer of The graphical probability distribution of ROE for...

Question 9

Whenever a firm borrows money, it is using financial leverage.

Accepted Answer

The answer of Whenever a firm borrows money, it is...

Question 10

Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

Accepted Answer

The answer of Other things held constant, an increase in...

Question 11

The Miller model begins with the MM model without corporate taxes and then adds personal taxes.

Accepted Answer

The answer of The Miller model begins with the MM...

Question 12

If a firm utilizes debt financing, an X% decline in earnings before interest and taxes (EBIT) will result in a decline in earnings per share that is larger than X.

Accepted Answer

The answer of If a firm utilizes debt financing, an...

Question 13

A firm's financial risk has identifiable market risk and diversifiable risk components.

Accepted Answer

The answer of A firm's financial risk has identifiable market...

Question 14

MM shows that in a world without taxes, a firm's value is not affected by its capital structure.

Accepted Answer

The answer of MM shows that in a world without...

Question 15

Provided a firm does not use an extreme amount of debt, financial leverage typically affects both EPS
and EBIT, while operating leverage affects only EBIT.

Accepted Answer

The answer of Provided a firm does not use an...

Question 16

A firm's business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses.

Accepted Answer

The answer of A firm's business risk is largely determined...

Question 17

Financial risk refers to the extra risk shareholders bear as a result of using debt as compared with the risk they would bear if no debt were used.

Accepted Answer

The answer of Financial risk refers to the extra risk...

Question 18

The Miller model begins with the MM model with taxes and then adds personal taxes.

Accepted Answer

The answer of The Miller model begins with the MM...

Question 19

Financial distress, agency costs, and direct and indirect bankruptcy costs affect a firm's target capital structure.

Accepted Answer

The answer of Financial distress, agency costs, and direct and...

Question 20

MM shows that in a world with taxes, a firm's optimal capital structure would be almost 100% debt.

Accepted Answer

The answer of MM shows that in a world with...

Quiz 12: Capital Structure Decisions