Question 1

Which of the following theories provides a reason that issuing debt may be favored over issuing equity?

Accepted Answer

A)  inside information
B)  agency considerations
C)  issuing costs
D)  all of the aboveE) All of the above
F) A) and C)

Question 2

Treasury stock refers to

Accepted Answer

A)  bonds issued by the U.S. government.
B)  ownership interests in a commercial bank.
C)  shares of stock that have been authorized to be sold, but that have not yet been sold to the public.
D)  shares of stock that have been repurchased by the company that issued them.E) B) and C)
F) A) and C)

Question 3

A firm that is worth $2 million and is financed with 40% risk-free debt and 60% equity grows in value to $3 million. What is its new debt-equity ratio?

Accepted Answer

A)  76.5%
B)  63.2%
C)  36.4%
D)  26.7%E) A) and C)
F) A) and B)

Question 4

A firm that is worth $1 million and is financed with 30% risk-free debt and 70% equity grows in value to $1.5 million. What is its new debt-equity ratio?

Accepted Answer

A)  25.0%
B)  33.3%
C)  20.0%
D)  26.3%E) B) and D)
F) None of the above

Question 5

A firm is currently financed with $2 million in debt and $6 million in equity. What will happen to its debt-equity ratio if it simultaneously issues another $2 million in debt and $2 million in
Equity?

Accepted Answer

A)  The debt-equity ratio would increase from 33 1/3% to 100%.
B)  The debt-equity ratio would increase from 25% to 33 1/3%.
C)  The debt-equity ratio would be unchanged.
D)  The debt-equity ratio would increase from 33 1/3% to 50%.E) A) and C)
F) A) and B)

Question 6

In what way do leveraged buyout firms deviate from the pecking order in their
financing arrangements? Be specific. What is a major result of this deviation?

Accepted Answer

LBO managers have inside information reg...

Question 7

True, False, or Uncertain: Managers should try to maintain the highest level of
liquidity that they possibly can in order to insure the firm has maximum financial
flexibility. Explain.

Accepted Answer

A) True 
 B)False

Question 8

Your firm has an excessive amount of cash and no good project opportunities on the
horizon. One of your colleagues suggests it be invested in Treasury bills in order to
earn at least a little more return for your shareholders. How would you respond to
this suggestion?

Accepted Answer

It would be better for your firm to retu...

Question 9

Which of the following statements regarding optimal capital structure is true?

Accepted Answer

A)  A firm that is not operating at its optimal capital structure is likely to be acquired by another firm that can earn arbitrage profits by purchasing the firm at a low market priceAnd making the necessary adjustments to it capital structure.
B)  The optimal capital structure tends to change as a firm's market value changes.
C)  The optimal capital structure is elusive and largely irrelevant, and managers can spend their time better on other issues.
D)  None of the above is a true statement.E) None of the above
F) A) and D)

Question 10

Which of the following statements regarding working capital management is (are) true?

Accepted Answer

A)  An irrevocable credit line will allow a firm to maintain its financial flexibility, even in times of financial distress, and is relatively low cost.
B)  Investing cash in liquid assets, such as Treasury bills, allows a firm to maintain financial flexibility at no cost.
C)  Matching income with liability streams works best if your cash flows are fairly predictable.
D)  All of the above are true statements.E) A) and B)
F) None of the above

Question 11

Empirical evidence suggests that

Accepted Answer

A)  managers tend to borrow more at long-term rates rather than use short-term debt when the yield curve is steep.
B)  managers tend to repurchase shares after the share price has increased and issue more equity when it has decreased in order to maintain the firm's debt-equity ratio.
C)  managers try to time the market in deciding when to repurchase their shares.
D)  All of the above are true statements.E) A) and B)
F) A) and C)

Question 12

Which of the following statements about the preliminary prospectus is (are) true?

Accepted Answer

A)  It indicates the maximum price at which the shares will be sold in the IPO.
B)  It typically provides a price range within which the shares are expected to be offered for sale.
C)  It provides prospective buyers with the specific assumptions used to set the price at which the shares will be offered.
D)  All of the above are true statements.E) A) and C)
F) C) and D)

Question 13

Trade credit is

Accepted Answer

A)  a type of bank loan.
B)  an international financing arrangement.
C)  venture capital financing.
D)  supplier financing.E) A) and C)
F) A) and B)

Question 14

What are the three methods described in this chapter that a publicly-held firm can use
to sell additional equity? Briefly explain each method.

Accepted Answer

The three methods are a standard issue, ...

Question 15

Which of the following actions would necessarily result in a higher firm value, all else equal?

Accepted Answer

A)  Convertible bondholders convert their bonds to shares of common stock.
B)  The firm retires some of its debt.
C)  The firm issues new debt.
D)  The firm repurchases its shares.E) A) and B)
F) B) and D)

Question 16

What are the two agency conflicts that might explain why IPOs tend to be
underpriced? Discuss briefly.

Accepted Answer

One conflict occurs because investment b...

Question 17

What is trade credit? How is it a source of financing? Are there any limitations
associated with this type of financing?

Accepted Answer

Trade credit is created when a supplier ...

Question 18

The underwriting fees charged by the investment bankers when a new security is issued are paid

Accepted Answer

A)  by the new shareholders.
B)  by both the old and the new shareholders, based on their percentage ownership interests.
C)  by the old shareholders.
D)  by all the existing investors in the firm, including the bondholders if it is a debt issue.E) B) and D)
F) None of the above

Question 19

Which of the following would be the most senior security?

Accepted Answer

A)  short-term, unsecured debt
B)  a collateralized, long-term bond with no covenants
C)  short-term debt with strong covenants
D)  an unsecured, long-term bond with strong covenantsE) A) and D)
F) B) and C)

Question 20

Which of the following statements about leveraged buyout firms (LBOs) is true?

Accepted Answer

A)  Because an LBO owns a portfolio of many different companies, it is very well-diversified and, therefore, has a very low cost of capital.
B)  LBOs typically use the assets of all their various companies to collateralize debt needed to finance additional acquisitions.
C)  LBOs follow the pecking order religiously when they finance their acquisitions.
D)  None of the above is a true statement.E) B) and D)
F) C) and D)

Exam 21: Capital Structure Dynamics

Which of the following statements regarding working capital management is (are) true?

Correct AnswerverifiedShow Answer

A firm that is worth $1 million and is financed with 30% risk-free debt and 70% equity grows in value to $1.5 million. What is its new debt-equity ratio?

Correct AnswerverifiedShow Answer

A firm is currently financed with $2 million in debt and $6 million in equity. What will happen to its debt-equity ratio if it simultaneously issues another $2 million in debt and $2 million in Equity?

Correct AnswerverifiedShow Answer

Which of the following would be the most senior security?

Correct AnswerverifiedShow Answer

Your firm has an excessive amount of cash and no good project opportunities on the horizon. One of your colleagues suggests it be invested in Treasury bills in order to earn at least a little more return for your shareholders. How would you respond to this suggestion?

Correct AnswerverifiedIt would be better for your firm to retu...View AnswerShow Answer

A firm that is worth $2 million and is financed with 40% risk-free debt and 60% equity grows in value to $3 million. What is its new debt-equity ratio?

Correct AnswerverifiedShow Answer

In what way do leveraged buyout firms deviate from the pecking order in their financing arrangements? Be specific. What is a major result of this deviation?

Correct AnswerverifiedLBO managers have inside information reg...View AnswerShow Answer

Trade credit is

Correct AnswerverifiedShow Answer

What are the two agency conflicts that might explain why IPOs tend to be underpriced? Discuss briefly.

Correct AnswerverifiedOne conflict occurs because investment b...View AnswerShow Answer

Which of the following theories provides a reason that issuing debt may be favored over issuing equity?

Correct AnswerverifiedShow Answer

Treasury stock refers to

Correct AnswerverifiedShow Answer

Which of the following statements regarding optimal capital structure is true?

Correct AnswerverifiedShow Answer

What are the three methods described in this chapter that a publicly-held firm can use to sell additional equity? Briefly explain each method.

Correct AnswerverifiedThe three methods are a standard issue, ...View AnswerShow Answer

Which of the following statements about leveraged buyout firms (LBOs) is true?

Correct AnswerverifiedShow Answer

Which of the following statements about the preliminary prospectus is (are) true?

Correct AnswerverifiedShow Answer

Which of the following actions would necessarily result in a higher firm value, all else equal?

Correct AnswerverifiedShow Answer

Empirical evidence suggests that

Correct AnswerverifiedShow Answer

The underwriting fees charged by the investment bankers when a new security is issued are paid

Correct AnswerverifiedShow Answer

What is trade credit? How is it a source of financing? Are there any limitations associated with this type of financing?

Correct AnswerverifiedTrade credit is created when a supplier ...View AnswerShow Answer

True, False, or Uncertain: Managers should try to maintain the highest level of liquidity that they possibly can in order to insure the firm has maximum financial flexibility. Explain.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
It would be better for your firm to retu...
View Answer

Correct Answer
verified

Correct Answer
verified
LBO managers have inside information reg...
View Answer

Correct Answer
verified

Correct Answer
verified
One conflict occurs because investment b...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The three methods are a standard issue, ...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Trade credit is created when a supplier ...
View Answer

Correct Answer
verified