For
more course tutorials visit
1. Which of the following
statements best describes the optimal capital structure?
a. The optimal capital structure
is the mix of debt, equity, and preferred stock that maximizes the company’s
earnings per share (EPS).
b. The optimal capital structure
is the mix of debt, equity, and preferred stock that maximizes the company’s
stock price.
c. The optimal capital structure
is the mix of debt, equity, and preferred stock that minimizes the company’s
cost of equity.
d. The optimal capital structure
is the mix of debt, equity, and preferred stock that minimizes the company’s cost
of debt.
e. The optimal capital structure
is the mix of debt, equity, and preferred stock that minimizes the company’s
cost of preferred stock.
2. Which of the following
statements is CORRECT?
a. A firm can use retained
earnings without paying a flotation cost. Therefore, while the cost of retained
earnings is not zero, its cost is generally lower than the after-tax cost of
debt.
b. The capital structure that
minimizes a firm’s weighted average cost of capital is also the capital
structure that maximizes its stock price.
c. The capital structure that
minimizes the firm’s weighted average cost of capital is also the capital
structure that maximizes its earnings per share.
d. If a firm finds that the cost
of debt is less than the cost of equity, increasing its debt ratio must reduce
its WACC.
e. Other things held constant, if
corporate tax rates declined, then the Modigliani-Miller tax-adjusted tradeoff
theory would suggest that firms should increase their use of debt.
3. Which of the following statements
is CORRECT?
a. In general, a firm with low
operating leverage also has a small proportion of its total costs in the form
of fixed costs.
b. There is no reason to think
that changes in the personal tax rate would affect firms’ capital structure decisions.
c. A firm with high business risk
is more likely to increase its use of financial leverage than a firm with low
business risk, assuming all else equal.
d. If a firm's after-tax cost of
equity exceeds its after-tax cost of debt, it can always reduce its WACC by
increasing its use of debt.
e. Suppose a firm has less than
its optimal amount of debt. Increasing its use of debt to the point where it is
at its optimal capital structure will decrease the costs of both debt and
equity financing.
4. Companies HD and LD have
identical amounts of assets, operating income (EBIT), tax rates, and business
risk. Company HD, however, has a much higher debt ratio than LD. Company HD’s
basic earning power ratio (BEP) exceeds its cost of debt (rd). Which of the following
statements is CORRECT?
a. Company HD has a higher return
on assets (ROA) than Company LD.
b. Company HD has a higher times
interest earned (TIE) ratio than Company LD.
c. Company HD has a higher return
on equity (ROE) than Company LD, and its risk, as measured by the standard
deviation of ROE, is also higher than LD’s.
d. The two companies have the
same ROE.
e. Company HD’s ROE would be
higher if it had no debt.
5. Which of the following
statements is CORRECT?
a. Generally, debt-to-total-assets
ratios do not vary much among different industries, although they do vary among
firms within a given industry.
b. Electric utilities generally
have very high common equity ratios because their revenues are more volatile
than those of firms in most other industries.
c. Drug companies (prescription,
not illegal!) generally have high debt-to-equity ratios because their earnings
are very stable and, thus, they can cover the high interest costs associated
with high debt levels.
d. Wide variations in capital
structures exist both between industries and among individual firms within
given industries. These differences are caused by differing business risks and
also managerial attitudes.
e. Since most stocks sell at or
very close to their book values, book value capital structures are almost
always adequate for use in estimating firms' costs of capital.
No comments:
Post a Comment