1.
1. All else equal, higher All else equal, higher financial leverage financial leverage decreases a decreases a firms !rea"#even firms !rea"#even $%&'.$%&'. Ans(
Ans( False False Level( Level( %asic %asic Su!)ect( Su!)ect( Financial Financial Leverage Leverage 'y'ype( pe( ConceptsConcepts *.
*. %usiness ris" dec%usiness ris" declines as the sylines as the systematic ris" of a stematic ris" of a firms assets increfirms assets increases.ases. Ans(
Ans( False False Level( Level( %asic %asic Su!)ect( Su!)ect( %usiness %usiness +is" +is" 'y'ype( pe( ConceptsConcepts .
. %usiness ris" is %usiness ris" is a positive function a positive function of the systematic rof the systematic ris" of a is" of a firms assets.firms assets. Ans(
Ans( 'rue 'rue Level( Level( %asic %asic Su!)ect( Su!)ect( %usiness %usiness +is" +is" 'y'ype( pe( ConceptsConcepts -.
-. &gnoring financial distress costs, !or&gnoring financial distress costs, !orroing money decreases the roing money decreases the value of the firm !y increvalue of the firm !y increasing the firmsasing the firms ta/ lia!ility.
ta/ lia!ility. Ans(
Ans( False False Level( Level( %asic %asic Su!)ect( Su!)ect( &nterest &nterest 'a'a/ / Shield Shield 'y'ype( pe( ConceptsConcepts 0.
0. Suppose e Suppose e ish to drish to dra a ga a graph illustrating 2raph illustrating 2 Proposition & Proposition &&. &. Let the veLet the vertical a/is rrtical a/is represent the epresent the costcost of capital and the firms de!t#to#equity ratio represent the hori3ontal a/is4 then if the slope of the line of capital and the firms de!t#to#equity ratio represent the hori3ontal a/is4 then if the slope of the line representing the firms 5A
representing the firms 5ACC has a negative slope, CC has a negative slope, e must !e incorporating ta/es into e must !e incorporating ta/es into the analysis.the analysis. Ans(
Ans( 'rue 'rue Level( Level( %asic %asic Su!)ect( Su!)ect( 2 2 Proposition Proposition && && 'y'ype( pe( ConceptsConcepts 6.
6. irect !an"ruptcy costs are irect !an"ruptcy costs are those costs that are directly asthose costs that are directly associated ith !an"ruptcy, sociated ith !an"ruptcy, such as legal andsuch as legal and administrative costs.
administrative costs. Ans(
Ans( 'rue 'rue Level( Level( %asic %asic Su!)ect( Su!)ect( %an"ruptcy %an"ruptcy Costs Costs 'y'ype( pe( ConceptsConcepts 7.
7. &ndirect !an"ruptcy &ndirect !an"ruptcy costs include the ccosts include the costs of avoiding osts of avoiding a !an"ruptcy filing a !an"ruptcy filing incurred !y a incurred !y a financiallyfinancially distressed firm.
distressed firm. Ans(
Ans( 'rue 'rue Level( Level( %asic %asic Su!)ect( Su!)ect( %an"ruptcy %an"ruptcy Costs Costs 'y'ype( pe( ConceptsConcepts 8.
8. &t has !een o!serve&t has !een o!served that, hen firms get into financial trou!le, they ofd that, hen firms get into financial trou!le, they often find it difficult to attract andten find it difficult to attract and retain high#quality employees.
retain high#quality employees. 'he additional costs incurred 'he additional costs incurred in this situation ould !e considered directin this situation ould !e considered direct !an"ruptcy costs.
!an"ruptcy costs. Ans(
Ans( False False Level( Level( %asic %asic Su!)ect( Su!)ect( %an"ruptcy %an"ruptcy Costs Costs 'y'ype( pe( ConceptsConcepts 9.
9. 5hen a firm files for !a5hen a firm files for !an"ruptcy, n"ruptcy, the firm often must hire apprathe firm often must hire appraisers to determine the fair vaisers to determine the fair value of thelue of the firms assets.
firms assets. 'his is an 'his is an e/ample of a e/ample of a direct cost of direct cost of !an"ruptcy.!an"ruptcy. Ans(
Ans( 'rue 'rue Level( Level( %asic %asic Su!)ect( Su!)ect( %an"ruptcy %an"ruptcy Costs Costs 'y'ype( pe( ConceptsConcepts 1:.
1:. According to the According to the static theory of castatic theory of capital structure, value#ma/imi3ing pital structure, value#ma/imi3ing financial managers ill !orfinancial managers ill !orro to thero to the point here the firms !usiness ris" is )ust equal to its financial ris".
point here the firms !usiness ris" is )ust equal to its financial ris". Ans(
Ans( False False Level( Level( %asic %asic Su!)ect( Su!)ect( Capital Capital Structure Structure 'heories 'heories 'y'ype( pe( ConceptsConcepts
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11.
11. &f the static theory of ca&f the static theory of capital structure is true, then the optimal level of depital structure is true, then the optimal level of de!t for a given firm increas!t for a given firm increases as itses as its marginal ta/ rate increases and decreases as the costs of financial di
marginal ta/ rate increases and decreases as the costs of financial di stress increase.stress increase. Ans(
Ans( 'rue 'rue Level( Level( %asic %asic Su!)ect( Su!)ect( Capital Capital Structure Structure 'heories 'heories 'y'ype( pe( ConceptsConcepts 1*.
1*. &n order &n order to avoid !ato avoid !an"ruptcy, n"ruptcy, management sometimes management sometimes see"s to see"s to or" ith cror" ith creditors. editors. >ne method of>ne method of restructuring de!t involves composition, hich involves a reduction in the amount of the payment to !e restructuring de!t involves composition, hich involves a reduction in the amount of the payment to !e made.
made. Ans(
Ans( 'rue 'rue Level( Level( %asic %asic Su!)ect( Su!)ect( Agreements Agreements to to AvAvoid oid %an"ruptcy %an"ruptcy 'y'ype( pe( ConceptsConcepts 1.
1. 'he use of persona'he use of personal !orroing to change the overal !orroing to change the overall amount of financial leverage to hich the ll amount of financial leverage to hich the individual isindividual is e/posed is called(
e/posed is called( A
A?? ==oommeemmaadde e lleevveerraaggee.. %
%?? ivividideennd d rreeccaapptuturree.. C?
C? 'h'he ee eigighthted aed aveverarage cge cosost of t of cacapipitatal.l. ?
? PrPrivivatate e dede!t !t plplacaceemementnt.. $?
$? A pA pririvivilelegeged sud su!s!scrcripiptition on ofoffeferr.. Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( =omemade =omemade Leverage Leverage 'y'ype( pe( efinitionsefinitions 1-.
1-. 'he proposition that the 'he proposition that the value of the value of the firm is independent firm is independent of its capital strucof its capital structure is called(ture is called( A?
A? 'h'he Ce Capapitital al AAsssset et PrPricicining g ododelel.. %?
%? 22 P Proropoposisitition on & @& @iiththouout tat ta/e/es?s?.. C
C?? 22 PPrrooppoossiititioon n &&&&..
?? ''hhe e LLaa oof f >>nne e PPrriiccee.. $?
$? 'h'he $e $fffficicieient nt arar"e"ets =ts =yypopoththesesisis.. Ans(
Ans( % % Level( Level( %asic %asic Su!)ect( Su!)ect( 2 2 Proposition Proposition & & 'y'ype( pe( efinitionsefinitions 10.
10. 'he proposition that the 'he proposition that the cost of equity is cost of equity is a positive linear a positive linear function of capital sfunction of capital structure is called(tructure is called( A?
A? 'h'he Ce Capapitital al AAsssset et PrPricicining g ododelel.. %
%?? 22 P Prrooppoossiittiioon &n &.. C
C?? 22 PPrrooppoossiititioon n &&&&..
?? ''hhe e LLaa oof f >>nne e PPrriiccee.. $?
$? 'h'he $e $fffficicieient nt arar"e"ets =ts =yypopoththesesisis.. Ans(
Ans( C C Level( Level( %asic %asic Su!)ect( Su!)ect( 2 2 Proposition Proposition && && 'y'ype( pe( efinitionsefinitions 16.
16. 'he equity ris" de'he equity ris" derived from the rived from the firms operating acfirms operating activities is called tivities is called ris".ris". A
A?? mmaarr""eett %
%?? ssyysstteemmaattiicc C
C?? ee//ttrriinnssiicc
?? !!uussiinneessss $
$?? ffiinnaanncciiaall Ans(
Ans( Level( Level( %asic %asic Su!)ect( Su!)ect( %usiness %usiness +is" +is" 'y'ype( pe( efinitionsefinitions
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17.
17. 'he equity ris" de'he equity ris" derived from the rived from the firms capital structure firms capital structure policy is called policy is called ris". ris". A
A?? mmaarr""eett %
%?? ssyysstteemmaattiicc C
C?? ee//ttrriinnssiicc
?? !!uussiinneessss $
$?? ffiinnaanncciiaall Ans(
Ans( $ $ Level( Level( %asic %asic Su!)ect( Su!)ect( Financial Financial +is" +is" 'y'ype( pe( efinitionsefinitions 18.
18. 'he ta/ savings 'he ta/ savings of the firm of the firm derived from the derived from the deducti!ility of interest e/pensdeducti!ility of interest e/pense is called the(e is called the( A
A?? &&nnteterreesst tt taa/ s/ shhiieelldd.. %
%?? eepprreecciiaa!!lle !ae !assiiss.. C
C?? FFininaanncciing ng uumm!!rreelllala..
?? CCuurrrreennt t yyiieelldd.. $?
$? ''aa/#/#loloss css cararryry#f#fororaard srd savaviningsgs.. Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( &nterest &nterest 'a'a/ / Shield Shield 'y'ype( pe( efinitionsefinitions 19.
19. 'he unleve'he unlevered cost of capitared cost of capital is l is .. A?
A? the the coscost of ct of capiapital ftal for a or a firfirm itm ith no eh no equiquity in ty in its its capcapital ital strstructuucturere %?
%? the the coscost of ct of capiapital ftal for a or a firfirm itm ith no dh no de!t ie!t in its n its capcapital ital strstructuctureure C?
C? ththe ine interteresest tat ta/ sh/ shieield tld timeimes prs preteta/ na/ net iet incncomomee ?
? the cothe cost of pst of prefereferred rred stoc" stoc" for a for a firm firm ith eqith equal parual parts de!ts de!t and ct and common sommon stoc" in toc" in its caits capital spital structutructurere $?
$? equequal to tal to the phe profrofit marit margin fgin for a for a firm irm ith sith some dome de!t ie!t in its n its capcapitaital strl structuucturere Ans(
Ans( % % Level( Level( %asic %asic Su!)ect( Su!)ect( Bnlevered Bnlevered Cost Cost >f >f Capital Capital 'y'ype( pe( efinitionsefinitions *:.
*:. 'he e/plicit costs associated ith corpor'he e/plicit costs associated ith corporate default, such as legal e/peate default, such as legal e/penses, are the of nses, are the of the firm.the firm. A
A?? fflloottaattiioon cn coossttss %?
%? dedefafaulult !t !eteta ca coeoefffficicieientntss C?
C? didirerect ct !a!an"n"rrupuptctcy y ccosoststs ?
? ininddirireect ct !a!an"n"rrupuptctcy cy cosoststs $
$?? ddeeffaauullt rt riiss" p" prreemmiiaa Ans(
Ans( C C Level( Level( %asic %asic Su!)ect( Su!)ect( irect irect %an"ruptcy %an"ruptcy Costs Costs 'y'ype( pe( efinitionsefinitions *1.
*1. 'he implicit costs assoc'he implicit costs associated ith corporate deiated ith corporate default, such as fault, such as lost sales, are lost sales, are the of the of the firm.the firm. A
A?? fflloottaattiioon cn coossttss %?
%? dedefafaulult !t !eteta ca coeoefffficicieientntss C?
C? didirerect ct !a!an"n"rrupuptctcy y ccosoststs ?
? ininddirireect ct !a!an"n"rrupuptctcy cy cosoststs $
$?? ddeeffaauullt rt riiss" p" prreemmiiaa Ans(
Ans( Level( Level( %asic %asic Su!)ect( Su!)ect( &ndirect &ndirect %an"ruptcy %an"ruptcy Costs Costs 'y'ype( pe( efinitionsefinitions
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**.
**. 'he e/plicit and implicit cos'he e/plicit and implicit costs associated ith corts associated ith corporate default are porate default are the othe of the firm.f the firm. A
A?? fflloottaattiioon cn coossttss %?
%? dedefafaulult !t !eteta ca coeoefffficicieientntss C?
C? didirerect ct !a!an"n"rrupuptctcy y ccosoststs ?
? ininddirireect ct !a!an"n"rrupuptctcy cy cosoststs $?
$? ffininaancnciaial l ddisistrtresess s cocoststss Ans(
Ans( $ $ Level( Level( %asic %asic Su!)ect( Su!)ect( Financial Financial istress istress Costs Costs 'y'ype( pe( efinitionsefinitions *.
*. 'he proposition that a firm !orro'he proposition that a firm !orros up to the point here the mars up to the point here the marginal !enefit of the interest ta/ shginal !enefit of the interest ta/ shieldield derived from increased de!t is )ust equal
derived from increased de!t is )ust equal to the marginal e/pense of the resulting ito the marginal e/pense of the resulting increase in financialncrease in financial distress costs is called the(
distress costs is called the( A?
A? StStatatic 'ic 'heheorory of Cy of Capapitital Sal Strtrucuctuturere.. %
%?? 22 P Prrooppoossiittiioon &n &.. C
C?? 22 PPrrooppoossiititioon n &&&&.. ?
? CaCapipitatal l AAsssset et PrPricicining g ododelel.. $
$?? >>ppeen n aarr""eetts s ''hheeororeem.m. Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( Static Static 'heory 'heory >f >f Capital Capital Structure Structure 'y'ype( pe( efinitionsefinitions *-.
*-. 'he legal proceed'he legal proceeding for liquidating or ing for liquidating or reorgani3ing a reorgani3ing a firm operating in firm operating in default is called adefault is called a(( A
A?? ''eennddeer r ooffffeerr.. %
%?? %%aann""rruuppttccyy.. C
C?? eerrggeerr..
?? ''aa""eeoovveerr.. $
$?? PPrroo//y y ffiigghhtt.. Ans(
Ans( % % Level( Level( %asic %asic Su!)ect( Su!)ect( %an"ruptcy %an"ruptcy 'y'ype( pe( efinitionsefinitions *0.
*0. A firA firm that has nem that has negative ngative net orth is set orth is said to !e(aid to !e( A?
A? $/$/peperirienencicing a ng a !u!usisineness fss faiailulurere.. %
%?? &&n n leleggaal !l !aann""rruupptctcyy.. C?
C? $/$/peperirienencicing ng tetechchnicnical al ininsosolvelvencyncy.. ?
? $/$/peperirienencicing ng acaccocoununtinting g ininsosolvlvenencycy.. $?
$? &n &n !a!an"n"ruruptptcy cy rereororgaganini3a3atitionon.. Ans(
Ans( Level( Level( %asic %asic Su!)ect( Su!)ect( Accounting Accounting &nsolvency &nsolvency 'y'ype( pe( efinitionsefinitions *6.
*6. 'he complete termination of 'he complete termination of the firm as the firm as a going !usiness a going !usiness concern is called concern is called a .a . A
A?? mmeerrggeer r %
%?? rreeppuurrcchhaasse e pprrogogrraamm C
C?? lliiqquuiiddaattiioonn
?? rreeoorrggaannii33aattiioonn $
$?? ddiivveessttiittuurree Ans(
Ans( C C Level( Level( %asic %asic Su!)ect( Su!)ect( Liquidation Liquidation 'y'ype( pe( efinitionsefinitions
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-*7.
*7. 'he financial restructuring of a 'he financial restructuring of a failing firm to attempt to continue operations as failing firm to attempt to continue operations as a going concern is caa going concern is called alled a .
. A
A?? mmeerrggeer r %
%?? rreeppuurrcchhaasse e pprrogogrraamm C
C?? lliiqquuiiddaattiioonn
?? rreeoorrggaannii33aattiioonn $
$?? ddiivveessttiittuurree Ans(
Ans( Level( Level( %asic %asic Su!)ect( Su!)ect( +eorgani3ation +eorgani3ation 'y'ype( pe( efinitionsefinitions *8.
*8. A capA capital restrital restructuructuring occuring occurs hen a firm(s hen a firm( A?
A? &nc&ncreareases its deses its de!t#!t#equequity raity ratio hitio hile maile maintantaininining a constg a constant de!ant de!t#tt#to#ao#assesset ratiot ratio.. %?
%? ChaChangenges its s its de!de!t#et#equity quity ratratio iio ithothout chut changanging iing its tots total atal assessets.ts. C?
C? +ed+educeuces !oth is !oth its dets de!t an!t and its eqd its equity uity hile mhile mainaintaintaining a cing a consonstantant de!t de!t#et#equiquity raty ratio.tio. ?
? ChaChangenges its its les level vel of dof de!t e!t ithithout out chachanginging ing its tts totaotal eql equityuity.. $?
$? +e+efifinanancnces es its its dede!t a!t at a lt a looer er rarate ote of if intntereresest.t. Ans(
Ans( % % Level( Level( %asic %asic Su!)ect( Su!)ect( Capital Capital +estructuring +estructuring 'y'ype( pe( efinitionsefinitions *9.
*9. 'he e/ten'he e/tent to hich a firm reliet to hich a firm relies on de!t is refers on de!t is referred to as(red to as( A
A?? ==oommeemmaadde e lleevveerraaggee.. %
%?? ''hhe e ttaarrggeet t rraattiioo.. C
C?? %%uussinineesss s lleevveerraaggee..
?? PPrrooppoossiittiioon n &&.. $
$?? FFininaanncciaial l lelevveerraaggee.. Ans(
Ans( $ $ Level( Level( %asic %asic Su!)ect( Su!)ect( Financial Financial Leverage Leverage 'y'ype( pe( efinitionsefinitions :.
:. 'he eighted averag'he eighted average cost of ce cost of capital can also !e apital can also !e defined as the(defined as the( A?
A? aar"r"et et eieighghteted cd cosost of t of eqequiuity fty finainancncinging.. %?
%? +a+ate te of of reretuturn rn !a!asesed od on nn net et !o!oo" o" vavalulue.e. C?
C? AdAd)u)uststed ed hohomememamade de leleveverarage ge rarate te of of reretuturnrn.. ?
? +e+eququirired red retetururn on n on a fia firmrms os oveverarall all assssetets.s. $?
$? %a%asisis os of f 2 2 PrPropopososititioion &n &.. Ans(
Ans( Level( Level( %asic %asic Su!)ect( Su!)ect( +equired +equired +eturn +eturn >n >n Assets Assets 'y'ype( pe( efinitionsefinitions 1.
1. 'he cost of 'he cost of equity capital, !ased on equity capital, !ased on 2 Proposition &&2 Proposition &&, can !e def, can !e defined as(ined as( A? A? + + $$ + + D @+ D @+ AA # + # + ? @E$?.? @E$?. %? %? + + $$ + + AA D @+ D @+ AA # + # + ? @$E?.? @$E?. C? C? + + $$ + + AA D @+ D @+ AA # + # + ? @E$?.? @E$?. ? ? + + $$ + + AA D @+ D @+ # + # + AA? @$E?.? @$E?. $? $? + + $$ + + # @+ # @+ # + # + AA? @E$?.? @E$?. Ans(
Ans( C C Level( Level( %asic %asic Su!)ect( Su!)ect( 2 2 Proposition Proposition && && 'y'ype( pe( efinitionsefinitions
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*.
*. 'he theory that a change in the 'he theory that a change in the capital structure eights is e/actly ofcapital structure eights is e/actly offset !y the change in fset !y the change in the cost of equitythe cost of equity is "non as(
is "non as( A
A?? ==oommeemmaadde e lleevveerraaggee.. %
%?? FFininaanncciaial l lelevveerraaggee.. C?
C? 'h'he te tarargegeteted cd capapitaital sl strtrucucturture te theheororyy..
?? 22 P Prrooppoossiittiioon &n &.. $
$?? 22 P Prrooppoossiittiioon &n &&&.. Ans(
Ans( $ $ Level( Level( %asic %asic Su!)ect( Su!)ect( 2 2 Proposition Proposition && && 'y'ype( pe( efinitionsefinitions .
. 'he fact that individual investors can a'he fact that individual investors can alter the amount of financial leverage tlter the amount of financial leverage to hich they are e/posed iso hich they are e/posed is referred to as(
referred to as( A?
A? CaCapipitatal sl strtrucuctuture re tatargrgetetining.g. %?
%? AdAd)u)uststining tg the he !u!usisinnesess rs risis".". C?
C? 'h'he se statatic tic thetheory ory of of cacapitpital al ststruructcturure.e.
?? ==oommeemmaadde e lleevveerraaggee.. $
$?? 22 P Prrooppoossiittiioon &n &&&.. Ans(
Ans( Level( Level( %asic %asic Su!)ect( Su!)ect( =omemade =omemade Leverage Leverage 'y'ype( pe( efinitionsefinitions -.
-. 'he static theory of capital structure 'he static theory of capital structure states that firms !orro up states that firms !orro up to the point here the ta/ !enefit of to the point here the ta/ !enefit of oneone additional dollar of de!t is equal to the marginal cost of(
additional dollar of de!t is equal to the marginal cost of( A
A?? SSaalleess.. %
%?? $$qquuiittyy.. C
C?? FFininaanncciaial l ddisisttrreessss..
?? LLeevveerraaggee.. $
$?? FFiinnaanncciiaal cl caappiittaall.. Ans(
Ans( C C Level( Level( %asic %asic Su!)ect( Su!)ect( Static Static 'heory 'heory >f >f Capital Capital Structure Structure 'y'ype( pe( efinitionsefinitions 0.
0. 'he option of "e'he option of "eeping a financially eping a financially distressed firm as distressed firm as an operating concean operating concern is called a@rn is called a@n?(n?( A
A?? LLiiqquuiiddaattiioonn.. %
%?? ++eeoorrggaannii33aattiioonn.. C
C?? AAccqquuiissiittiioonn..
?? eerrggeerr.. $
$?? ''eecchhnnicicaal sl soollvveennccyy.. Ans(
Ans( % % Level( Level( %asic %asic Su!)ect( Su!)ect( +eorgani3ation +eorgani3ation 'y'ype( pe( efinitionsefinitions 6.
6. 'he proce'he procedure for liquiddure for liquidating a corpoating a corporation is outliration is outlined in(ned in( A?
A? 'h'he %ae %an"n"ruruptptcy acy and &nd &nsnsololvevencncy Ay Actct.. %
%?? ''hhe e %%A A AAcctt.. C?
C? 'h'he Ce Caananaddiaian Con Consnstititututitionon..
?? CChhaapptteer r 1111.. $?
$? 'h'he e SmSmalall %l %ususininesess s +e+efoform rm AActct.. Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( %an"ruptcy %an"ruptcy and and &nsolvency &nsolvency Act Act 'y'ype( pe( efinitionsefinitions
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7.
7. 'he a!solu'he a!solute priorite priority rule esta!listy rule esta!lishes the order in hiches the order in hich(h( A?
A? ClClaiaims ams are re papaid iid in a n a !a!an"n"ruruptcptcy py proroceceededining.g. %?
%? FiFirmrms as are lre liqiquiuidadateted !y d !y ththe !ae !an"n"ruruptptcy ccy couourtrts.s. C?
C? +e+eororgaganini3a3atition eon eveventnts mus must ost occccurur.. ?
? %a%an"n"ruruptptcy cy cacaseses as are re hehearard !y d !y the the cocoururtsts.. $?
$? GuGudgdges es arare ae assssigignened td to !o !anan"r"rupuptcy tcy cacaseses.s. Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( A!solute A!solute Priority Priority +ule +ule 'y'ype( pe( efinitionsefinitions 8.
8. 5hich of the f5hich of the folloing is trolloing is true a!out the 5ue a!out the 5ACACCHCH A?
A? 'he 5'he 5AACC is thCC is the appe appropropriariate diste discoucount rant rate fote for all ner all ne pro pro)ec)ects of thts of the fire firm.m. %?
%? 'he 'he optoptimaimal cal capitapital strl structucture ure is this the one one the that maat ma/im/imi3ei3es ths the 5e 5AACC.CC. C?
C? 'he 'he valvalue of ue of the fthe firm irm ill !ill !e mae ma/imi/imi3ed 3ed hen hen the the 55AACC is CC is minminimi3imi3ed.ed. ?
? 'he 5'he 5AACC is virCC is virtuatually imlly impospossi!si!le to cale to calculculate flate for a firor a firm ith mulm ith multipltiple divie divisiosions.ns. $?
$? Since Since discodiscount runt rates ates and and firm firm value value move move in thin the sae same dme directioirection, mn, minimi3ininimi3ing thg the 5e 5AACC ilCC illl minimi3e the value of the firm.
minimi3e the value of the firm. Ans(
Ans( C C Level( Level( %asic %asic Su!)ect( Su!)ect( 5A5ACC CC 'y'ype( pe( ConceptsConcepts 9.
9. 5hen choosing a 5hen choosing a capital structure, the capital structure, the o!)ective of the fo!)ective of the firm should !e to(irm should !e to( A?
A? ChoChoose tose the ohe one thne that maat ma/imi/imi3es t3es the che currurrent vent valualue of the of the fire firms !ms !ondonds.s. %?
%? ChChoooose tse the ohe one tne thahat mint minimimi3ei3es ths the vae valulue of te of the fhe firirm.m. C?
C? ChChoooose tse the ohe one tne thahat mint minimimi3ei3es ths the fie firmrms 5s 5AACC.CC. ?
? ChoChoose ose the othe one thne that reat resulsults in ts in the the larlargegest inst interterest est ta/ sta/ shiehield.ld. $?
$? ChoChoose ose any any capcapital ital strstructucture ure sinsince ce it iit is as alaylays irs irrelrelevaevant.nt. Ans(
Ans( C C Level( Level( %asic %asic Su!)ect( Su!)ect( Capital Capital Structure Structure 'y'ype( pe( ConceptsConcepts -:.
-:. 'he optima'he optimal capital strucl capital structure is the mi/ture of de!ture is the mi/ture of de!t and equity hich(t and equity hich( &.
&. a/imi3es a/imi3es the the value value of of the the firm.firm. &&.
&&. inimi3es the firms inimi3es the firms eighted average ceighted average cost of capital.ost of capital. &&&.
&&&. a/imi3es the mar"et a/imi3es the mar"et price of the price of the firms !onds.firms !onds. A
A?? & & oonnllyy %
%?? &&&&& & oonnllyy C
C?? & & aannd d &&& & oonnllyy
?? & & aannd d &&&&& & oonnllyy $
$?? &&, , &&&&, , aannd d &&&&&& Ans(
Ans( C C Level( Level( %asic %asic Su!)ect( Su!)ect( >ptimal >ptimal Capital Capital Structure Structure 'y'ype( pe( ConceptsConcepts -1.
-1. 5hich of 5hich of the folloing is the folloing is >' accurate >' accurate regarding fregarding financial leverageHinancial leverageH A?
A? 5hene5henever a ver a firms firms de!t de!t increincreases ases fastefaster thar than its n its equityequity, f, financiinancial leal leveragverage ince increasereases.s. %?
%? LevLeveraerage ge is mis most ost !en!enefieficiacial hl hen en $%&$%&' i' is rs relaelativetively hly highigh.. C?
C? &nve&nvestors stors can ucan undo thndo the efe effects fects of thof the fire firms cms capital apital strucstructure ture !y us!y using hoing homemadmemade levee leverage.rage. ?
? &nc&ncreareasing fsing finainancincial leval leveraerage ilge ill alayl alays incrs increasease the $Pe the $PS for stS for stoc"oc"holholderders.s. $?
$? 'he l'he level oevel of finf financiaancial level leverage rage that that producproduces thes the hige highest fhest firm vairm value is lue is the othe one mone most !est !eneficneficial toial to stoc"holders.
stoc"holders. Ans(
Ans( Level( Level( %asic %asic Su!)ect( Su!)ect( Financial Financial Leverage Leverage 'y'ype( pe( ConceptsConcepts
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-*.
-*. All else the All else the same, the same, the financial leverage financial leverage of a of a firm ill firm ill #.#. A?
A? dedecrcreaease ase as ths the dee de!tE!tEeqequiuity rty ratatio iio incncrereasaseses %?
%? decdecrearease ase as ths the fe firmirms rs retaetaineined ed earnarningings as accoccount unt grogross C?
C? incincrearease se !y t!y the he amoamount unt of of equequity ity it iit issussues es in a in a givgiven en yeyear ar ?
? dedecrcreaease ise if thf the fe firirm ham has ns negegatative ive nenet int incocomeme $?
$? decdecrearease ase as ths the fe firm irm useuses ds de!t e!t to fto fund und e/pe/pansansion ion propro)ec)ectsts Ans(
Ans( % % Level( Level( %asic %asic Su!)ect( Su!)ect( Financial Financial Leverage Leverage 'y'ype( pe( ConceptsConcepts -.
-. Suppose you orSuppose you or" for the CF> " for the CF> of anforth, &nc. of anforth, &nc. =e !elieves sales =e !elieves sales and operating income and operating income ill !e sharplyill !e sharply higher each year for the foreseea!le future.
higher each year for the foreseea!le future. &f he see"s to ma/imi3e earnings per share, he should&f he see"s to ma/imi3e earnings per share, he should .
. @Assume there are no ta/es. ?@Assume there are no ta/es. ? A?
A? inincrcreaease se the the fifirmrms s dede!t !t to to eqequituity ry ratatioio %?
%? increincrease ase the fthe firms irms de!t de!t to eqto equity ruity ratio iatio if the f the firms firms $%&' $%&' ill rill remain emain !elo !elo the !the !rea"#rea"#eveneven @comparing levered
@comparing levered to unlevered? to unlevered? level of $%&level of $%&'' C?
C? dedecrcreaease se ththe fe firirms ms dede!t !t to to eqequituity y raratiotio ?
? nonot ct chahangnge te the he fifirmrms s dede!t !t to to eqequiuity ty raratiotio $?
$? decredecrease tase the fhe firms irms de!t tde!t to eqo equity ruity ratio if atio if the fthe firms irms $%&' $%&' ill reill remain !main !elo telo the !rhe !rea"#eea"#evenven @comparing levered
@comparing levered to unlevered? to unlevered? level of $%&level of $%&'' Ans(
Ans( $ $ Level( Level( %asic %asic Su!)ect( Su!)ect( Financial Financial Leverage Leverage 'y'ype( pe( ConceptsConcepts --.
--. 5hich of the 5hich of the folloing statements isEare trufolloing statements isEare true regarding core regarding corporate !orroing heporate !orroing hen $%&' is pn $%&' is positiveHositiveH &.
&. &ncreasing &ncreasing financial financial leverage leverage increases increases the sethe sensitivity of nsitivity of $PS a$PS and +>$ nd +>$ to to changes changes in in $%&'$%&' &&.
&&. 'he e'he effect ffect of fof financial leveraginancial leverage depende depends on s on the cthe companys $%&ompanys $%&', ', that is, that is, leverage leverage is unfais unfavoura!levoura!le hen $%&' is relatively high, and
hen $%&' is relatively high, and leverage is favoura!le hen $%&' is relatively loleverage is favoura!le hen $%&' is relatively lo &&&.
&&&. =igh =igh leverage leverage decreases decreases the the returns returns to to shareholders shareholders @as @as measured measured !y !y +>$?+>$? A
A?? & & oonnllyy %
%?? &&& & oonnllyy C
C?? &&&&& & oonnllyy
?? & & aannd d &&& & oonnllyy $
$?? &&, , &&&&, , aannd d &&&&&& Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( Financial Financial Leverage Leverage 2 2 Capital Capital Structure Structure 'y'ype( pe( ConceptsConcepts -0.
-0. 5hich of 5hich of the folloing sthe folloing statements regarding tatements regarding leverage is leverage is falseHfalseH A?
A? 'he 'he ultiultimate mate effeffect ect of lof leveeveragrage dee depenpends on ds on the the firfirms $ms $%&'%&'.. %?
%? &f th&f things gings go pooro poorly for ly for the fithe firm, incrm, increasreased leved leverage erage providprovides ges greater reater returreturns to ns to shareshareholdeholders @ars @ass measured !y +>$ and $PS?.
measured !y +>$ and $PS?. C?
C? As a As a firfirm levm leverers ups up, sh, shareareholholderders ars are e/e e/posposed to ed to gregreater ater risris".". ?
? 'he !'he !enefitenefits of ls of leveraeverage ilge ill not !e l not !e as gras great in eat in a fira firm ith sm ith su!stanu!stantial actial accumulacumulated losted losses oses or other otherr types of ta/ shields compared to a firm ithout many ta/ shields.
types of ta/ shields compared to a firm ithout many ta/ shields. $?
$? %ey%eyond a ceond a certartain poiin point, the cnt, the costosts of fins of financancial diial distrstress oess oututeigeigh the !enh the !enefiefits of levts of leveraerage.ge. Ans(
Ans( % % Level( Level( %asic %asic Su!)ect( Su!)ect( Leverage Leverage 'y'ype( pe( ConceptsConcepts
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-6.
-6. %elo the !rea"#eve%elo the !rea"#even $%&', n $%&', increased financial increased financial leverage ill leverage ill $PS, all else the $PS, all else the same. same. AssumeAssume there are no ta/es.
there are no ta/es. A
A?? iinnccrreeaassee %
%?? ddeeccrreeaassee C
C?? nnoot t aaffffeecctt ?
? eieithther er inincrcreaease se or or dedecrcreaeasese $?
$? inincrcreaeasse $e $%&%&' !' !ut ut dedecrcreeaasese Ans(
Ans( % % Level( Level( %asic %asic Su!)ect( Su!)ect( %rea"#even %rea"#even $%&' $%&' 'y'ype( pe( ConceptsConcepts -7.
-7. All else the same, hich of the folloing claims on All else the same, hich of the folloing claims on the cash flos of the fthe cash flos of the firm ill tend to increase ithirm ill tend to increase ith decreases in the de!tEequity ratioH
decreases in the de!tEequity ratioH &.
&. 'a'a/es/es &&.
&&. %an"ruptcy %an"ruptcy costscosts &&&.
&&&. Stoc"holder Stoc"holder claimsclaims &I.
&I. %ondholder %ondholder claimsclaims A
A?? & & aannd d &&&&& & oonnllyy %
%?? & & aannd d &&I I oonnllyy C
C?? &&& & aannd d &&I I oonnllyy
?? &&, , &&&&, , aannd d &&&&& & oonnlyly $
$?? &&, , &&&&, , aannd d &&I I oonnllyy Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( Cash Cash Flo Flo 2 2 Leverage Leverage 'y'ype( pe( ConceptsConcepts -8.
-8. 5hich of the f5hich of the folloing solloing statemetatements is corrents is correctHctH A?
A? ecisecisions ions regarregarding ding a fia firms rms de!t de!t and eand equity quity can can !e c!e called alled capitacapital !udl !udgeting geting decisdecisionsions %?
%? 'he a'he assesset !ett !eta is a ma is a measeasure oure of the f the unsyunsystemstematic atic risris" of a f" of a firmirms ass assetsetss C?
C? &n a pur&n a purely caely capitapital restl restrucructurturing, thing, the compe composiosition otion of the asf the assetsets of the fis of the firm ilrm ill chanl changege ?
? 'he v'he value of alue of the ovthe overall ferall firm ill irm ill not cnot change hange as a ras a result esult of a cof a capital apital restrestructurructuring unling unless thess the PI e PI ofof the restructuring is negative
the restructuring is negative $?
$? 'he u'he use of se of perspersonal leonal leveragverage !y e !y an inan investor vestor to alteto alter the r the degrdegree of ee of finanfinancial lcial levereverage oage of a f a firm firm isis called homemade leverage
called homemade leverage Ans(
Ans( $ $ Level( Level( %asic %asic Su!)ect( Su!)ect( =omemade =omemade Leverage Leverage 'y'ype( pe( ConceptsConcepts -9.
-9. According to , According to , the value of the value of the firm is indethe firm is independent of its cpendent of its capital structure.apital structure. A?
A? 22 P Proropoposisitition on & & iiththouout tt ta/a/eses %?
%? 2 2 PProroppososititioion & n & iith th tata/e/ess C?
C? ththe e ststatatic ic ththeoeory ry of of cacapitpital al ststruructctururee ?
? 22 P Proropoposisitition on && && iiththouout tt ta/a/eses $?
$? 2 2 PProroppososititioion &n && & itith th taa/e/ess Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( 2 2 Proposition Proposition & & 'y'ype( pe( ConceptsConcepts
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0:.
0:. 'he cost of de!t is gener'he cost of de!t is generally loer than the cost of equity4 hoeverally loer than the cost of equity4 hoever, according to , according to , replacing, replacing equity ith de!t ill not change the value of the firm !ecause the savings attri!uta!le to the loer cost of equity ith de!t ill not change the value of the firm !ecause the savings attri!uta!le to the loer cost of de!t financing ill !e
de!t financing ill !e offset !y the higher required return on the remaining equitoffset !y the higher required return on the remaining equit y.y. A?
A? 2 2 PProroppososititioion & n & itith th taa/e/ess %?
%? 22 P Proropoposisitition on & & iiththouout tt ta/a/eses C?
C? ththe e ststatatic ic ththeoeory ry of of cacapitpital al ststruructctururee ?
? 22 P Proropoposisitition on && && iiththouout tt ta/a/eses $?
$? 2 2 PProroppososititioion &n && & itith th taa/e/ess Ans(
Ans( % % Level( Level( %asic %asic Su!)ect( Su!)ect( 2 2 Proposition Proposition & & 'y'ype( pe( ConceptsConcepts 01.
01. implies that the implies that the firm should issue firm should issue as much de!as much de!t as possi!le.t as possi!le. A?
A? 2 2 PProroppososititioion & n & itith th taa/e/ess %?
%? 22 P Proropoposisitition on & & iiththouout tt ta/a/eses C?
C? ththe e ststatatic ic ththeoeory ry of of cacapitpital al ststruructctururee ?
? 22 P Proropoposisitition on && && iiththouout tt ta/a/eses $?
$? 2 2 PProroppososititioion &n && & itith th taa/e/ess Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( Capital Capital Structure Structure 'heories 'heories 'y'ype( pe( ConceptsConcepts 0*.
0*. According to 2 Proposition && ithout ta/esAccording to 2 Proposition && ithout ta/es, a firms cost of equity is a , a firms cost of equity is a function of hich of thefunction of hich of the folloing factorsH
folloing factorsH &.
&. 'he 'he required required rate rate of of return return on on the the firms firms assetsassets &&. 'he
&&. 'he firms firms de!tEequity de!tEequity ratioratio &&&. 'he
&&&. 'he firms firms cost cost of of de!tde!t A
A?? &&& & oonnllyy %
%?? & & aannd d &&& & oonnllyy C
C?? & & aannd d &&&&& & oonnllyy
?? &&& & aannd d &&&&& & oonnllyy $
$?? &&, , &&&&, , aannd d &&&&&& Ans(
Ans( $ $ Level( Level( %asic %asic Su!)ect( Su!)ect( 2 2 Proposition Proposition && && 'y'ype( pe( ConceptsConcepts 0.
0. Assume there Assume there are no are no corporate or corporate or personal ta/es. personal ta/es. According According to 2 Prto 2 Proposition(oposition( A?
A? &, the &, the total vtotal value of alue of the firthe firm depem depends on nds on ho caho cash flsh flos aros are divie divided up ded up !etee!eteen stocn stoc"holde"holders anrs andd !ondholders.
!ondholders. %?
%? &, &, a fa firirmms cs capapitaital sl strtrucuctuture re is is rerelelevavantnt.. C?
C? &&&&, the c, the cost oost of eqf equity uity risrises aes as the fs the firm iirm incrncreaseases ites its use s use of deof de!t fi!t finannancincing.g. ?
? &&&&, the co, the cost of est of equiquity depty dependends on the fs on the firmirms !uss !usineiness riss ris" !us" !ut not itt not its fins financancial riial ris".s". $?
$? & and & and &&, a&&, as de!t s de!t increincreasesases, the in, the increacrease in tse in the cohe cost of est of equity is quity is more tmore than ofhan offset fset !y the !y the loer cloer cost ofost of de!t and the 5ACC falls.
de!t and the 5ACC falls. Ans(
Ans( C C Level( Level( %asic %asic Su!)ect( Su!)ect( 2 2 5ithout 5ithout 'a'a/es /es 'y'ype( pe( ConceptsConcepts
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0-.
0-. Assume there are no perAssume there are no personal or corporate income tasonal or corporate income ta/es and that the firms 5/es and that the firms 5ACC is unafACC is unaffected !y itsfected !y its capital structure.
capital structure. 5hich of the 5hich of the folloing is trueHfolloing is trueH &.
&. A A firms firms cost cost of of equity deequity depends pends on on the the firms firms !usiness !usiness and and financial financial ris"s.ris"s. &&.
&&. 'he value of the firm is 'he value of the firm is dependent on its capital structure.dependent on its capital structure. &&&.
&&&. 'he cost of equity increase'he cost of equity increases as the firms leverage s as the firms leverage decreases.decreases. A
A?? & & oonnllyy %
%?? &&& & oonnllyy C
C?? &&&&& & oonnllyy
?? & & aannd d &&&&& & oonnllyy $
$?? &&& & aannd d &&&&& & oonnllyy Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( 2 2 5ithout 5ithout 'a'a/es /es 'y'ype( pe( ConceptsConcepts 00.
00. 5hich of the folloing is true c5hich of the folloing is true concerning the rate of reoncerning the rate of return earned on shares of turn earned on shares of a levered firm in terms ofa levered firm in terms of the possi!le range of earningsH 'here are no ta/es.
the possi!le range of earningsH 'here are no ta/es. A?
A? 'he 'he retreturnurns ds do noo not dift differ fer frfrom thom those ose of of an uan unlenleververed fed firmirm.. %?
%? 'he r'he returneturns ars are gre greater eater than than for afor an unlen unlevered vered firm ofirm on the n the upsidupside and e and equal equal on the on the donsdonside.ide. C?
C? 'he r'he returneturns ars are the e the same same as fas for an or an unlevunlevered ered firm firm on the on the upsidupside and e and loer loer on the on the donsidonside.de. ?
? 'he r'he returneturns ars are gre greater eater than than for afor an unlen unlevered vered firm ofirm on the n the upsidupside and e and loer loer on thon the doe donsidenside.. $?
$? 'he r'he returneturns ars are the e the same same as fas for an or an unlevunlevered ered firm firm on the on the upsidupside and e and greagreater on ter on the dthe donsidonside.e. Ans(
Ans( Level( Level( %asic %asic Su!)ect( Su!)ect( Levered Levered +ates +ates >f >f +eturn +eturn 'ype( 'ype( ConceptsConcepts 06.
06. 'he equity !e'he equity !eta of a ta of a firm depends firm depends on hich of on hich of the folloingHthe folloingH &. 'he
&. 'he firms firms !usiness !usiness ris".ris". &&.
&&. 'he firms 'he firms financial policyfinancial policy.. &&&.
&&&. 'he firms 'he firms advertising policyadvertising policy.. A
A?? & & aannd d &&& & oonnllyy %
%?? &&&&& & oonnllyy C
C?? & & aannd d &&&&& & oonnllyy
?? &&& & aannd d &&&&& & oonnllyy $
$?? &&, , &&&&, , aannd d &&&&&& Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( $quity $quity %eta %eta 'y'ype( pe( ConceptsConcepts 07.
07. A A firms systematic firms systematic ris" ill ris" ill as as its de!tEequity ratio its de!tEequity ratio .. A
A?? iinnccrreeaassee4 i4 innccrreeaasseess %
%?? ddeeccrreeaasese4 4 ddeeccrreeaasseess C?
C? reremamain in ununchchanangeged4 d4 dedecrcreaeasesess ?
? reremamain in ununchchanangeged4 d4 inincrcreaeasesess $?
$? fifirsrst int incrcreaeasese, an, and thd then den dececrereasase4 ie4 incncrereasaseses Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( %usiness %usiness 2 2 Financial Financial +is" +is" 'y'ype( pe( ConceptsConcepts
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08.
08. arises arises from decisions that from decisions that affect the affect the left#hand side of left#hand side of the !alance sheethe !alance sheet, hilet, hile arises from decisions that affe
arises from decisions that affect the right#hand side of the !alance sheet.ct the right#hand side of the !alance sheet. A?
A? SySyststemematatic ic riris"s"4 f4 fininanancicial al riris" s" %?
%? %u%usisineness ss riris"s"4 4 fifinanancnciaial l riris" s" C?
C? BnBnsysyststemematatic ric risis"4 s"4 syyststemematatic ric risis" " ?
? %u%usisineness rss risis"4 d"4 diviverersisififia!a!le rle risis" " $?
$? SySyststemematatic ric risis"4 "4 ununsysyststemematatic ric risis" " Ans(
Ans( % % Level( Level( %asic %asic Su!)ect( Su!)ect( %usiness %usiness 2 2 Financial Financial +is" +is" 'y'ype( pe( ConceptsConcepts 09.
09. 5hich 5hich of of the the folloing folloing correctly correctly completes completes this this sentence( sentence( All All else else the the same, same, .. A?
A? the !the !usiusinesness riss ris" of a f" of a firm inirm increcreaseases hes hen it tan it ta"es "es on a ron a ris"y is"y propro)ec)ectt %?
%? the the !us!usineiness rss ris" ois" of a ff a firm iirm incrncreaseases es hen hen it tait ta"es "es on moon more dre de!te!t C?
C? the the finfinancancial rial ris" is" of a of a firfirm decm decreareases ses hehen it tn it ta"ea"es on a s on a risris"y p"y pro)ro)ectect ?
? the the finfinancancial rial ris" is" of a of a firfirm incm increareases ses hehen it tan it ta"es "es on moon more ere equiquityty $?
$? the hthe highigher ther the !use !usineiness riss ris" fs" for a for a firmirm, the h, the highigher ther the fine financancial rial ris" ais" as els elll Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( %usiness %usiness 2 2 Financial Financial +is" +is" 'y'ype( pe( ConceptsConcepts 6:.
6:. All else the same, hich of the folloing is true All else the same, hich of the folloing is true a!out the interest ta/ shield of a!out the interest ta/ shield of a firm ith positive $%&'Ha firm ith positive $%&'H A?
A? 'he h'he higheigher the cr the corporporaorate ta/ rte ta/ rateate, the le, the less vass valualua!le th!le the inte intereerest ta/ sst ta/ shiehield.ld. %?
%? &f th&f the firm e firm dramadramatically tically increaincreases itses its deps depreciareciation etion e/pense/pense, it may , it may have mhave more oore of a nef a need foed for an inr an interesterestt ta/ shield.
ta/ shield. C?
C? 'he i'he intenteresrest ta/ sht ta/ shield !ield !ecoecomes mmes more vore valualua!la!le as the as the si3e si3e of the of the de!e de!t load it load incrncreaseases.es. ?
? 'he i'he intenteresrest ta/ sht ta/ shield iield incrncreaseases as a fes as a firm rirm redueduces ices its levts level of oel of outsutstantanding dding de!te!t.. $?
$? Since Since the inthe interesterest ta/ t ta/ shielshield is d is valuavalua!le, th!le, the fire firm oum ould rald rather ther pay a pay a high chigh coupon oupon rate rate on its on its !onds!onds than a lo coupon rate.
than a lo coupon rate. Ans(
Ans( C C Level( Level( %asic %asic Su!)ect( Su!)ect( &nterest &nterest 'a'a/ / Shield Shield 'y'ype( pe( ConceptsConcepts 61.
61. According to , a firms cAccording to , a firms cost of equity increases ith greost of equity increases ith greater de!t financing, !ut the 5ater de!t financing, !ut the 5ACCACC remains unchanged.
remains unchanged. A?
A? 2 2 PProroppososititioion & n & itith th taa/e/ess %?
%? 22 P Proropoposisitition on & & iiththouout tt ta/a/eses C?
C? ththe e ststatatic ic ththeoeory ry of of cacapitpital al ststruructctururee ?
? 22 P Proropoposisitition on && && iiththouout tt ta/a/eses $?
$? 2 2 PProroppososititioion &n && & itith th taa/e/ess Ans(
Ans( Level( Level( %asic %asic Su!)ect( Su!)ect( 2 2 Proposition Proposition && && 'y'ype( pe( ConceptsConcepts 6*.
6*. According to , a firms cAccording to , a firms cost of equity increases ith greost of equity increases ith greater de!t financing, and the 5ater de!t financing, and the 5ACCACC decreases.
decreases. A?
A? 2 2 PProroppososititioion & n & itith th taa/e/ess %?
%? 22 P Proropoposisitition on & & iiththouout tt ta/a/eses C?
C? ththe e ststatatic ic ththeoeory ry of of cacapitpital al ststruructctururee ?
? 22 P Proropoposisitition on && && iiththouout tt ta/a/eses $?
$? 2 2 PProroppososititioion &n && & itith th taa/e/ess Ans(
Ans( $ $ Level( Level( %asic %asic Su!)ect( Su!)ect( 2 2 Proposition Proposition && && 'y'ype( pe( ConceptsConcepts
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6.
6. 5hich 5hich of of the the folloing folloing correctly correctly completes completes the the folloing( folloing( 2 2 & & ith ith ta/es ta/es shosshos .
. A?
A? the vathe value of lue of an unan unleverelevered firm d firm e/ceee/ceeds the ds the value value of a leof a leverevered firm d firm !y the !y the prespresent vaent value of lue of the intthe interesterest ta/ shield
ta/ shield %?
%? a la leveeverered fid firm rm can can incincrearease se its its valvalue ue !y !y redreduciucing ng de!de!tt C?
C? the the optoptimaimal amol amount ount of levf levererage age for for a fia firm is rm is not pnot possossi!li!le to de to deteetermirminene ?
? the vathe value of lue of a levea levered fred firm is irm is equal tequal to its ao its aftertafterta/ $%&' / $%&' discoudiscounted !y nted !y the unthe unleverelevered cost d cost of caof capitalpital $?
$? thethere is a lre is a lineinear rear relatilationsonship !hip !eteteen teen the amhe amounount of det of de!t in a le!t in a leververed fied firm anrm and its vad its valuelue Ans(
Ans( $ $ Level( Level( %asic %asic Su!)ect( Su!)ect( 2 2 & & 5ith 5ith 'a'a/es /es 'y'ype( pe( ConceptsConcepts 6-.
6-. A firA firm that is approam that is approaching !aching !an"rupn"ruptcy ill find thattcy ill find that A?
A? stostoc"hc"holdeolders irs ill try tll try to puso push the fh the firm inirm into !ato !an"rn"ruptuptcy as rcy as rapiapidly adly as poss possi!si!lele %?
%? !ondh!ondholderolders ill s ill attempt attempt to puto push the sh the firm firm into !into !an"ran"ruptcy uptcy to prto prevent event their their positioposition frn from deteom deteriorarioratingting C?
C? stostoc"hc"holdeolders irs ill sell see" to pre" to protecotect the vat the value olue of the af the assessets of thts of the fire firm as mucm as much as poh as possissi!le!le ?
? dirdirect ect !an!an"ru"ruptcy ptcy coscosts sts such uch as fas filiniling feg fees ies ill tell tend to nd to dimidiminisnishh $?
$? indindireirect !act !an"rn"ruptcuptcy coy costs ssts such auch as ops opporportunitunity coty costs sts ill teill tend to dnd to decrecreaseasee Ans(
Ans( % % Level( Level( %asic %asic Su!)ect( Su!)ect( %an"ruptcy %an"ruptcy 'y'ype( pe( ConceptsConcepts 60.
60. 5hich of the 5hich of the folloing is >' true folloing is >' true a!out !an"ruptcy a!out !an"ruptcy and its costsHand its costsH A?
A? As thAs the de!e de!tEequity tEequity ratio ratio falls, falls, the pthe pro!a!ro!a!ility tility that a hat a firm firm ill !e ill !e a!le a!le to meto meet the et the promispromised payed paymentsments on !onds decreases.
on !onds decreases. %?
%? &f a &f a firm firm is ecis economiconomically !ally !an"ruan"rupt, thpt, then aen an ensn ensuing luing legal egal !an"r!an"ruptcy uptcy ill liill li"ely r"ely result esult in thein the !ondholders receiving less than hat they are oed.
!ondholders receiving less than hat they are oed. C?
C? 'he a'he amount mount of deof de!t a !t a firm firm can rcan raise aise decredecreases ases as thas the proe pro!a!ility !a!ility of !aof !an"rupn"ruptcy intcy increacreases.ses. ?
? A fA firm is irm is econoeconomically mically !an"r!an"rupt heupt hen the vn the value oalue of its af its assets ssets is less is less than tthan the vahe value of lue of its deits de!t.!t. $?
$? irirect ect !an!an"ru"ruptcy ptcy coscosts ats are a re a disdisincincententive ive to dto de!t e!t finfinancancinging.. Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( %an"ruptcy %an"ruptcy Costs Costs 'y'ype( pe( ConceptsConcepts 66.
66. 5hich of 5hich of the folloing outhe folloing ould !e consld !e considered an idered an indirect !an"ruptcy indirect !an"ruptcy costHcostH A?
A? 'he c'he cost oost of the f the e/tra e/tra insurinsurance ance the !the !an"ruan"ruptcy cptcy court ourt requirequires tres the fhe firm to irm to carry carry on iton its asss assets.ets. %?
%? 'he c'he cost tost the fihe firm murm must past pay to thy to the coue court hrt hen fien filing ling its !its !an"an"rupruptcy ptcy petitetition.ion. C?
C? 'he c'he cost oost of the f the appraappraisals isals a fira firm must m must o!tain o!tain on its on its asseassets !y ts !y order order of thof the !ae !an"rupn"ruptcy ctcy court.ourt. ?
? 'he 'he fee fee the fthe firm pirm payays its s its laylayer to er to dradra up t up the !he !an"an"rupruptcy ptcy petitetitionion.. $?
$? 'he c'he cost to tost to the fihe firm of prrm of pro)eo)ects icts in#pn#progrogresress ters terminaminated in oted in orderder to prer to preserserve cave cash.sh. Ans(
Ans( $ $ Level( Level( %asic %asic Su!)ect( Su!)ect( irect irect %an"ruptcy %an"ruptcy Costs Costs 'y'ype( pe( ConceptsConcepts 67.
67. 5hen the value 5hen the value of a firms of a firms assets e/actly eqassets e/actly equals the value of uals the value of its de!t, the firm(its de!t, the firm( A?
A? &&s es eccononomomicicaalllly !y !anan"r"rupupt.t. %?
%? &&s ts teechchnnicicalally ly ininsosolvlvenent.t. C
C?? &&s s leleggaallly ly !!aann"r"ruupptt..
?? &&s s iin n lliiqquuiiddaattiioonn.. $
$?? &&s s iin n ddeeffaauulltt.. Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( Financial Financial istress istress 'y'ype( pe( ConceptsConcepts
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68.
68. According to , a firms cAccording to , a firms cost of equity increases ith greost of equity increases ith greater de!t financing, hile the 5ater de!t financing, hile the 5ACCACC first decreases and then
first decreases and then increases.increases. A?
A? 2 2 PProroppososititioion & n & itith th taa/e/ess %?
%? 22 P Proropoposisitition on & & iiththouout tt ta/a/eses C?
C? ththe e ststatatic ic ththeoeory ry of of cacapitpital al ststruructctururee ?
? 22 P Proropoposisitition on && && iiththouout tt ta/a/eses $?
$? 2 2 PProroppososititioion &n && & itith th taa/e/ess Ans(
Ans( C C Level( Level( %asic %asic Su!)ect( Su!)ect( Static Static 'heory 'heory >f >f Capital Capital Structure Structure 'y'ype( pe( ConceptsConcepts 69.
69. According to According to the static theory the static theory of capital of capital structure, structure, .. A?
A? a fa firmirms cs choihoice oce of asf assetsets ans and opd operaeratiotions ins is fs fi/ei/ed fod for ar all till timeme %?
%? a fira firm ill !om ill !orro rro up to tup to the pohe point herint here the !e the !enefenefit froit from an em an e/tra do/tra dollar ollar of de!t f de!t is )usis )ust equat equal to thel to the ta/ !enefit associated ith that de!t
ta/ !enefit associated ith that de!t C?
C? the vthe valualue of the of the fire firm ill dim ill diffffer frer from the om the 2 va2 value lue ithoithout taut ta/es !y /es !y the gathe gain frin from levom leveraeragege ?
? the the optoptimaimal 5l 5AACC iCC is ths the sae same ame as it s it is iis in n 2 2 ith ith ta/ta/eses $?
$? the vthe value alue of thof the fire firm in m in 2 i2 ith ta/th ta/es is es is oversoverstated tated !y the !y the amounamount of t of finanfinancial dcial distreistress css costsosts Ans(
Ans( $ $ Level( Level( %asic %asic Su!)ect( Su!)ect( Static Static 'heory 'heory 'y'ype( pe( ConceptsConcepts 7:.
7:. >f the folloing, all a>f the folloing, all are conclusions that re conclusions that can !e dran can !e dran from the capital sfrom the capital structure pu33le $JC$P'tructure pu33le $JC$P'(( A?
A? &n the &n the frameframeor" oor" of the sf the static ttatic theory heory of caof capital spital structutructure, a fre, a firm cairm can precn precisely iisely identify dentify its opits optimaltimal capital structure.
capital structure. %?
%? Firms Firms ith taith ta/ shie/ shields flds from orom other ther sourcsources sues such ach as des depreciapreciation tion ill !eill !enefit nefit less less from from leveraleverage.ge. C?
C? Firms Firms in loin loer taer ta/ !ra/ !rac"ets c"ets ill teill tend to nd to !enef!enefit lesit less frs from incom increasreases in es in finanfinancial lcial leveraeverage.ge. ?
? 'he f'he financiinancial stral structure ucture that mthat minimi3einimi3es 5s 5ACACC is the C is the one thone that ill at ill ma/imi3ma/imi3e the ve the value alue of the of the firm.firm. $?
$? All elAll else thse the same same, fire, firms itms ith tanh tangi!gi!le, lile, liquiquid assd assets iets ill havll have an ine an incencentive ttive to !oro !orro mro moreore.. Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( Capital Capital Structure Structure 'heories 'heories 'y'ype( pe( ConceptsConcepts 71.
71. 5hich of the 5hich of the folloing individuals has >' folloing individuals has >' acquired a acquired a mar"eted claim against +G, mar"eted claim against +G, &nc.H&nc.H A?
A? GoGohn phn pururchchasased *ed *0: s0: shahareres of +s of +G cG comommon mon ststococ".". %?
%? 'o'om acqm acquiruired ried rightghts allos alloining him to pg him to purcurchashase 0: she 0: shareares of +s of +G comG common smon stoctoc".". C?
C? FiFirsrst Stt Statate %ae %an" n" rorote ate an unn unsesecucurered lod loan tan to +o +G.G. ?
? SusSusan an purpurchachased sed *:: *:: shashares res of of +G +G prepreferferrered sd stoctoc".". $?
$? GiGim pum purcrchahasesed a ld a lonong#g#teterm rm !o!ond nd isissusued ed !y +!y +GG.. Ans(
Ans( C C Level( Level( %asic %asic Su!)ect( Su!)ect( ar"eta!le ar"eta!le Claims Claims 'y'ype( pe( ConceptsConcepts 7*.
7*. 5hich of the 5hich of the folloing statements isEare trufolloing statements isEare true regarding o!see regarding o!served capital structuresrved capital structuresHH &.
&. 'here 'here appears appears to to !e !e some some connection connection !eteen !eteen operating operating characteristics characteristics and and capital capital structurestructure &&.
&&. E$ E$ ratios ratios are are significantly significantly higher higher today today than than they they ere ere in in the the 196:s.196:s. &&&.
&&&. &t appears that, for hatever reason, capital structures vary quite a !it across diffe&t appears that, for hatever reason, capital structures vary quite a !it across differing industryring industry groups
groups A
A?? & & oonnllyy %
%?? &&&&& & oonnllyy C
C?? & & aannd d &&&&& & oonnllyy
?? & & aannd d &&& & oonnllyy $
$?? &&, , &&&&, , aannd d &&&&&& Ans(
Ans( $ $ Level( Level( %asic %asic Su!)ect( Su!)ect( >!served >!served Capital Capital Structures Structures 'y'ype( pe( ConceptsConcepts
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1-7.
7. &n a@n? &n a@n? a !usines a !usiness is liquidated, usuas is liquidated, usually at a loss flly at a loss for the creditors.or the creditors. A?
A? viviololatatioion of pn of prorotetectctivive coe covevenanantntss %
%?? lleeggaal !l !aann""rruuppttccyy C
C?? tteecchhnnicicaal il innssoolvlveenncycy ?
? aaccccouounntitinng g ininsosolvlvenencycy $
$?? !!uussiinneesss fs faaiilluurree Ans(
Ans( $ $ Level( Level( %asic %asic Su!)ect( Su!)ect( %usiness %usiness Failure Failure 'y'ype( pe( ConceptsConcepts 7-.
7-. &f a firm fails to ma"e the &f a firm fails to ma"e the required interest payments on its longrequired interest payments on its long#term !onds, it is said to !e in(#term !onds, it is said to !e in( A
A?? %%uussiinneesss fs faaiilluurree.. %
%?? AAccccoouunntiting ng ffaaililuurree.. C?
C? AcAccocoununtiting ng ininsosolvlveencncyy.. ?
? ''eechchninicacal il insnsololvevencncyy.. $
$?? $$ccoonnoommiic c ffaaiilluurree.. Ans(
Ans( Level( Level( %asic %asic Su!)ect( Su!)ect( 'e'echnical chnical &nsolvency &nsolvency 'y'ype( pe( ConceptsConcepts 70.
70. 5hen a firm defa5hen a firm defaults on a legal o!ligatioults on a legal o!ligation, n, .. A?
A? it it is is cacalllled ed a !a !ususininesess fs faiailulurere %?
%? ththe e fifirm rm is is in in lelegagal !l !anan"r"rupuptctcyy C?
C? ththe fe firirm is m is in in tetechchninicacal inl insosolvlvenencycy ?
? ththe fie firm irm is in as in accccouountntining ing insosolvlvenencycy $?
$? ththe fie firm irm is in s in viviolaolatiotion of n of prproteotectctivive ce covovenenanantsts Ans(
Ans( C C Level( Level( %asic %asic Su!)ect( Su!)ect( 'e'echnical chnical &nsolvency &nsolvency 'y'ype( pe( ConceptsConcepts 76.
76. >f the f>f the folloing, doeolloing, does >' s >' necessarily indicate necessarily indicate financial distress.financial distress. A
A?? !!uussiinneesss s ffaaiilluurree %
%?? lleeggaal !l !aann""rruuppttccyy C
C?? tteecchhnnicicaal il innssoolvlveenncycy ?
? aaccccouounntitinng g ininsosolvlvenencycy $?
$? an an ininvovoluluntntarary !y !anan"r"rupuptctcy py petetititioionn Ans(
Ans( Level( Level( %asic %asic Su!)ect( Su!)ect( Accounting Accounting &nsolvency &nsolvency 'y'ype( pe( ConceptsConcepts 77.
77. KoKou are u are a securea secured creditor in d creditor in a !an"ruptcy a !an"ruptcy liquidation. liquidation. Listed !elo, Listed !elo, in chronological in chronological order, order, are the are the stepssteps in the !an"ruptcy
in the !an"ruptcy proceeding. proceeding. Gust prior to Gust prior to hich step ould yhich step ould you e/pect to have ou e/pect to have to document the streto document the strengthngth of your claim on the
of your claim on the firms assetsHfirms assetsH A?
A? 'h'he ce cororpoporaratiotion fin fileles a !s a !anan"r"rupuptcy tcy pepetittitionion %?
%? A A trtrusustetee ie in !n !anan"r"rupuptctcy iy is es elelectcteded C?
C? AssAssets aets are lire liquiquidatdated aned and !ad !an"rn"ruptuptcy acy admindministristratioation cosn costs arts are pae paidid ?
? 'h'he pre prococeeeeds ads are dre disistrtri!i!uteuted amd amonong crg crededitoitorsrs $?
$? +e+esisidudual al papaymymenents ts arare me madade te to so shaharerehoholdldererss Ans(
Ans( Level( Level( %asic %asic Su!)ect( Su!)ect( %an"ruptcy %an"ruptcy Chronology Chronology 'y'ype( pe( ConceptsConcepts
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78.
78. 5hich of the 5hich of the folloing descri!es a folloing descri!es a correct priority of correct priority of claims in a !claims in a !an"ruptcy liquidationHan"ruptcy liquidationH A?
A? 5a5agesges, gove, governmrnment taent ta/ clai/ claims, coms, consunsumer clmer claimaims, pres, preferferred sred stoctoc"ho"holdeldersrs %?
%? <over<overnment nment ta/ ta/ claimsclaims, !a, !an"rupn"ruptcy etcy e/pense/penses, us, unsecunsecured red credcreditors, itors, prefpreferred erred stoc"stoc"holderholderss C?
C? %an%an"ru"ruptcy eptcy e/pe/pensenses, cons, consumsumer claer claimsims, unse, unsecurcured creed creditoditors, gors, goververnmenment ta/ clant ta/ claimsims ?
? <over<overnment nment ta/ ta/ claimsclaims, un, unsecursecured ed creditcreditors, ors, prefepreferred rred stoc"stoc"holdeholders, rs, !an"r!an"ruptcy uptcy e/pene/pensesses $?
$? %an%an"ru"ruptcy eptcy e/pe/pensenses, ags, ages, unes, unsecsecureured cred creditoditors, prrs, prefeeferrerred stocd stoc"ho"holderlderss Ans(
Ans( $ $ Level( Level( %asic %asic Su!)ect( Su!)ect( %an"ruptcy %an"ruptcy Claims Claims Priority Priority 'y'ype( pe( ConceptsConcepts 79.
79. 5hich of the folloing >$S not correc5hich of the folloing >$S not correctly ran" the priority of claims of tly ran" the priority of claims of the parties to a corporatethe parties to a corporate !an"ruptcyH @+an" from strongest to ea"est. ?
!an"ruptcyH @+an" from strongest to ea"est. ? A?
A? 5a5ages ges and and salsalariaries4 es4 conconsumsumer cer claimlaims4 uns4 unsecsecureured crd credieditortorss %?
%? ConContri!tri!utioutions to emns to employployee !enee !enefiefit plant plans4 cons4 consumsumer claer claimsims4 comm4 common stoon stoc"hc"holdeoldersrs C?
C? <ov<overernmenment ta/ cnt ta/ claimlaims4 prs4 prefeeferrerred stod stoc"hc"holdoldersers4 uns4 unsecuecured cred credreditoritorss ?
? %an"r%an"ruptcyuptcy#rela#related ted adminiadministratistrative ve e/pene/penses4 ses4 ages ages and and salarsalaries4 ies4 common common stoc"stoc"holderholderss $?
$? 5a5ages ges and and salsalariaries4 es4 conconsumsumer cer claimlaims4 prs4 prefeeferrerred std stoc"oc"holdholdersers Ans(
Ans( C C Level( Level( %asic %asic Su!)ect( Su!)ect( Priority Priority >f >f Claims Claims 'y'ype( pe( ConceptsConcepts 8:.
8:. 5hich of the follo5hich of the folloing is true regaring is true regarding !an"rding !an"ruptcyuptcyHH A?
A? LiqLiquiduidatiation fon freqrequenuently itly is cos convenverterted ind into a to a reoreorgrganiani3at3ationion.. %?
%? &n a pre&n a prepacpac", cre", creditoditors agrs agree to a reree to a reorgorganiani3at3ation plion plan pran prior to thior to the !ane !an"ru"ruptcy fptcy filiniling.g. C?
C? FirFirms cams cannonnot file !t file !an"an"rupruptcy to etcy to escascape lonpe long#tg#term leerm leaseases on clos on closed ssed stortores.es. ?
? CreCreditoditors ors of thf the fie firm marm may noy not int initiaitiate !ate !an"rn"ruptuptcy pcy procroceedeedingsings.. $?
$? A A party party other other than than the cthe currenurrent firm t firm managemanagement mument must ta"st ta"e coe control ntrol of thof the fire firm !efm !efore iore it comet comes out s out ofof !an"ruptcy.
!an"ruptcy. Ans(
Ans( % % Level( Level( %asic %asic Su!)ect( Su!)ect( Prepac"aged Prepac"aged %an"ruptcy %an"ruptcy 'y'ype( pe( ConceptsConcepts 81.
81. 5hich of the 5hich of the folloing are true folloing are true hen a firm hen a firm is operating at its is operating at its target capital starget capital structure pointHtructure pointH &.
&. 'he 'he 5A5ACC CC is is at at its its minimum minimum point.point. &&.
&&. 'he 'he de!t#equity de!t#equity ratio ratio is is equal equal to to 1.1. &&&.
&&&. Shareholder Shareholder value value is is ma/imi3ed.ma/imi3ed. &I.
&I. 'he 'he total total value value of of the the firm firm is is ma/imi3ed.ma/imi3ed. A
A?? & & aannd d &&I I oonnllyy %
%?? &&& & aannd d &&&&& & oonnllyy C
C?? & & aannd d &&&&& & oonnllyy
?? &&, , &&&&&&, , aannd d &&I I oonnlyly $
$?? &&, , &&&&, , &&&&&&, a, annd d &&II Ans(
Ans( Level( Level( &ntermediate &ntermediate Su!)ect( 'aSu!)ect( 'arget rget Capital Capital Structure Structure 'y'ype( pe( ConceptsConcepts 8*.
8*. 'he value of 'he value of a restructuring is a restructuring is equal to the neequal to the net present value ot present value of the(f the( A?
A? +e+esusultilting cng chahangnge in e in ththe toe totatal val valulue of e of the the fifirmrm.. %?
%? AddAdditioitional nal de!de!t inct incurrurred med minuinus the s the addadditioitional inal intenteresrest e/pt e/pensense.e. C?
C? e!e!t ot outsutstantandinding mg minus inus the the marmar"et "et valvalue ue of of the the equequityity.. ?
? eet ct chahangnge ie in tn the he tottotal al dede!t !t ououtststatandndinging.. $?
$? ChaChange in thnge in the shae sharehreholdolders vaers value minlue minus the aus the addidditiontional intal intereerest e/pst e/pensense incue incurrerred.d. Ans(
Ans( A A Level( Level( %asic %asic Su!)ect( Su!)ect( +estructuring +estructuring IaIalue lue 'y'ype( pe( ConceptsConcepts
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