Question 1

It is possible that two firms could have identical financial and operating leverage, yet have different degrees of risk as measured by the variability of EPS.

Accepted Answer

True

Question 2

Which of the following statements is CORRECT?

Accepted Answer

D

Question 3

If Miller and Modigliani had incorporated the costs of bankruptcy into their model, it is unlikely that they would have concluded that 100% debt financing is optimal.

Accepted Answer

True

Question 4

Which of the following would increase the likelihood that a company would increase its debt ratio, other things held constant?

Accepted Answer

The answer of Which of the following would increase the...

Question 5

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 6

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 7

An increase in the debt ratio will generally have no effect on which of these items?

Accepted Answer

The answer of An increase in the debt ratio will...

Question 8

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 9

Financial risk refers to the extra risk stockholders 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 10

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 11

Firm A has a higher degree of business risk than Firm B. Firm A can
offset this by using less financial leverage. Therefore, the variability of both firms' expected EBITs could actually be identical.

Accepted Answer

The answer of Firm A has a higher degree of...

Question 12

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

Accepted Answer

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

Question 13

Business risk is affected by a firm's operations. Which of the following
Is NOT associated with (or does not contribute to) business risk?

Accepted Answer

The answer of Business risk is affected by a firm's...

Question 14

As the text indicates, a firm's financial risk has identifiable market risk and diversifiable risk components.

Accepted Answer

The answer of As the text indicates, a firm's financial...

Question 15

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

Accepted Answer

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

Question 16

Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?

Accepted Answer

The answer of Which of the following events is likely...

Question 17

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 18

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

Accepted Answer

The answer of The trade-off theory states that the capital...

Question 19

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 20

Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk.

Accepted Answer

The answer of Two firms, although they operate in different...

Quiz 15: Capital Structure Decisions

It is possible that two firms could have identical financial and operating leverage, yet have different degrees of risk as measured by the variability of EPS.

Which of the following statements is CORRECT?

If Miller and Modigliani had incorporated the costs of bankruptcy into their model, it is unlikely that they would have concluded that 100% debt financing is optimal.

Which of the following would increase the likelihood that a company would increase its debt ratio, other things held constant?

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.

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.

An increase in the debt ratio will generally have no effect on which of these items?

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.

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

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

Firm A has a higher degree of business risk than Firm B. Firm A can offset this by using less financial leverage. Therefore, the variability of both firms' expected EBITs could actually be identical.

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

Business risk is affected by a firm's operations. Which of the following Is NOT associated with (or does not contribute to) business risk?

As the text indicates, a firm's financial risk has identifiable market risk and diversifiable risk components.

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

Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?

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.

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

Which of the following statements is CORRECT?

Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk.