| Question 1 1 / 1 pts |
| A firm’s capital structure combines all forms of financing on which the firm relies including: All responses are true |
common equity
preferred shares
long term debt
| Question 2 1 / 1 pts |
| ________ refers to the difficulties experienced by firms as they attempt to meet financial commitments to their creditors. Financial distress |
Capital budgeting
Working capital management
Capital structure
| Question 3 1 / 1 pts |
| A firm’s risk level will fluctuate as its ________ changes All responses are true |
degree of financial leverage
financial leverage
debt to equity
| Question 4 1 / 1 pts |
| A firm’s capital structure combines all forms of long-term financing on which the firm relies EXCEPT: |
long-term debt
inventory
preferred shares
common equity
| Question 5 1 / 1 pts |
| According to data assembled for U.S. firms, the average level of debt as a percentage of capital is approximately equal across industries. False |
True
| Question 6 1 / 1 pts |
| The major real-world benefit of debt is that interest payments are: tax deductible expense |
made after tax considerations
always less than 10% of the firm’s profit
smaller than the dividend payments
| Question 7 1 / 1 pts |
| What are taxes payable for the Equity and debt firm? ALL EQUITY EQUITY AND DEBT Anticipated operating income $1,000,000 $1,000,000 Interest — $200,000 Earnings before tax $1,000,000 $800,000 Tax at 30% $300,000 $- Earnings after tax $700,000 $ Combined debt and equity income (interest plus earnings after tax) $700,000 $ $240,000 |
0
$560,000
$300,000
| Question 8 1 / 1 pts |
| What are the Earnings after tax for the Equity &Debt firm ALL EQUITY EQUITY AND DEBT Anticipated operating income $1,000,000 $1,000,000 Interest — $200,000 Earnings before tax $1,000,000 $800,000 Tax at 30% $300,000 $- Earnings after tax $700,000 $ Combined debt and equity income (interest plus earnings after tax) $700,000 $ $240,000 |
$560,000
$300,000
0
| Question 9 1 / 1 pts |
| The interest tax shield is equal to: the tax rate multiplied by the amount of interest. |
$0
(EBIT – I ) * (1-the tax rate).
(equity + debt) * (1-the tax rate)
| Question 10 1 / 1 pts |
| Due primarily to concerns about financial distress, we tend to see very few firms financed with ________ or more of their capital structure as debt. 70% |
55%
20%
35%
| Question 11 1 / 1 pts |
| ________ describes a legal state whereby a firm cannot pay its creditors Bankruptcy |
Liquification
Capital Structure
Capital distress
| Question 12 1 / 1 pts |
| The pecking-order model of capital structure suggests the order in which firms prefer to raise capital is: retained earnings, then debt, then external equity. |
preferred stock, then debt, then external equity.
debt, then external equity, then retained earnings.
debt, then retained earnings, then external equity.
| Question 13 1 / 1 pts |
| The major real-world benefit of debt is that interest payments are a tax-deductible expense. True |
False
Question 14 1 / 1 pts
The interest tax shield represents the value of the reduction in taxes that
results from allowable deductions from taxable income.
True
False
| Question 15 1 / 1 pts |
| Direct forms of bankruptcy costs include legal and administrative costs associated with the actual bankruptcy proceedings, as well as the money paid to lawyers. True |
False
| Question 16 1 / 1 pts |
| When two groups have different access to information, there is then symmetric information for these two groups. False |
True
| Question 17 1 / 1 pts |
Under conditions of asymmetric information, when a firm issues debt this
is more likely to be a negative signal, rather than a positive signal
regarding the firm’s future prospects.
True
False