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A company should select the capital structure that _____
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The manager of a firm should change the capital structure if and only if ___.
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finance
Chapter 16
| Question | Answer |
|---|---|
| A company should select the capital structure that _____ | maximizes the company's value |
| The manager of a firm should change the capital structure if and only if ___. | it increases the value of the firm |
| The value of the firm is maximized when the weighted average cost of capital (WACC) is _____. | minimized |
| The value of a firm is equal to the value of its _____. | debt plus equity |
| Financial leverage affects the performance of a firm because the range of possible values for ___. | earnings per share is wider |
| A firm's capital structure refers to ___. | the firm's mix of debt and equity |
| Volatility or ______ increases for equity holders when leverage increases. | risk |
| A beneficial rule to follow is to set the firm's capital structure so that Blank______ | the firm's value is maximized |
| An individual can duplicate a levered firm through a strategy called ____ where the investor uses his own funds plus borrowed funds to buy stocks. | homemade leverage |
| The value of the firm is maximized when the weighted average cost of capital (WACC) is (minimized/maximized). | minimized |
| According to M&M Proposition I, a firm's capital structure choices _____. | do not affect the value of the firm |
| ______ is the term that describes the capital structure when debt is used to finance assets. | Financial leverage |
| An investor who invests in the stock of a levered firm rather than in an all-equity firm will require: | a higher expected return. |
| Which of the following statements are true regarding the effect of financial leverage and the firm's operating earnings? | Financial leverage increases the slope of the EPS line. The rate of return on assets is unaffected by leverage. Below the indifference or break-even point in EBIT, an unlevered capital structure is best. |
| Under M&M Proposition II with no taxes, the weighted average cost of capital is invariant to the debt level because ___. | the return on assets (RA) is unchanged |
| The expected return on equity is _____ to leverage. | positively related |
| Which of the following are generally true about the cost of equity and the cost of debt? | The cost of debt is generally lower than the cost of equity. The cost of debt increases with leverage. The cost of equity may increase with leverage. |
| With ____, an investor is able to replicate a corporation's capital structure by borrowing funds and using those funds along with her own money to buy the company's stock. | homemade leverage |
| The equity risk that comes from the nature of a firm's operating activities is known as _____ risk. | business |
| In the absence of taxes, the value of a firm is the same with debt financing as it is with equity financing because ___. | MM demonstrated that debt financing is neither better nor worse than equity financing in the absence of taxes the asset to be financed is the same |
| Holding equity in an unlevered firm has no risk. | false |
| MM Proposition II shows that ___. | the cost of equity rises with leverage. |
| In 2019, the net interest deduction is limited to what percent of EBITDA? | 50 |
| Under the MM propositions with no taxes, managers cannot change the value of the firm by repackaging its securities because __. | the overall cost of capital cannot be reduced as debt is added, the equity becomes more risky |
| When calculating the cash flow for a levered firm, you must consider _____. | cash flows to both bondholders and stockholders |
| The WACC is the cost of ______ times its weight in the capital structure plus the cost of ______ times its weight in the capital structure | debt; equity |
| What is the most important benefit of debt? | It provides a tax benefit. |
| The equity risk that comes from the financial policy or capital structure decisions of the firm is known as _____ risk. | financial |
| What is the expression for the value of a levered firm in the presence of corporate taxes? | Value of Levered Firm = Value of Unlevered Firm + Tax Benefit of Debt |
| An unlevered firm ____. | has an all-equity capital structure |
| In the presence of corporate taxes, the tax shield effect of debt will ____ the value of the firm. | increase |
| According to the Tax Cuts and Jobs Act of 2017, after 2021, the net interest deduction drops to what percent of EBIT? | 30 |
| The value of a levered firm will be greater than the value of an identical unlevered firm because the levered firm's taxes will be: | lower. |
| A corporation gains no value from an interest tax shield if which of the following are true? | Corporate tax rates are zero. The corporation has no debt. The corporation is an all-equity fir |
| Which of these statements is true regarding corporate capital structures? | The capital structure that maximizes the value of the firm provides the most benefit for its stockholders. |
| The value of a levered firm in MM Proposition I with corporate taxes equals the value of an all-equity firm Blank______. | plus the tax rate times the value of debt |
| M&M Proposition I does not work with corporate taxes because ___. | levered firms pay lower taxes than unlevered firms |
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