Question 1

Which one of the following statements concerning bankruptcy is correct?

Accepted Answer

A)  Bondholders have a greater incentive than stockholders to keep a firm from filing for bankruptcy.
B)  An indirect cost of bankruptcy is the loss of key employees.
C)  Bankruptcy is sometimes used as a means to increase payroll costs.
D)  The assets of a firm tend to increase in value when a firm is in financial distress.
E)  The administrative costs incurred in a bankruptcy are considered indirect bankruptcy costs.F) All of the above
G) A) and C)

Question 2

As an attempt to avoid bankruptcy,a firm may

Accepted Answer

A)  agree to a composition with its creditors.
B)  employ the stalking horse strategy.
C)  develop a prepack agreement.
D)  take advantage of a Section 363 auction.
E)  ask a trustee to enact the absolute priority rule.F) None of the above
G) C) and D)

Question 3

Indirect bankruptcy costs

Accepted Answer

A)  effectively limit the amount of equity a firm issues.
B)  serve as an incentive to increase the financial leverage of a firm.
C)  tend to increase as the debt-equity ratio decreases.
D)  include the costs incurred by a firm as it tries to avoid seeking bankruptcy protection.
E)  include the legal and accounting fees incurred during the bankruptcy process.F) None of the above
G) A) and B)

Question 4

The pecking order theory states that when external funds are required,a firm should

Accepted Answer

A)  refund all monies pulled from internal sources with external funds.
B)  only issue equity securities after the firm's debt capacity is reached.
C)  never issue any convertible securities.
D)  issue convertible bonds prior to straight bonds.
E)  limit its debt-equity ratio to no more than 0.5.F) B) and E)
G) C) and E)

Question 5

Which one of these best describes the relationship between bondholders and stockholders at a time when it appears the firm may be facing increased financial distress?

Accepted Answer

A)  Stockholders have an incentive to underinvest in new projects to the detriment of bondholders.
B)  Both parties tend to work together for the common good of the firm.
C)  Both bondholders and stockholders will encourage the firm to take on new high risk projects.
D)  Bondholders will tend to lower their required rate of interest so the firm can afford additional financing until its financial status improves.
E)  Bondholders tend to milk the property at the expense of stockholders.F) A) and D)
G) B) and D) A

Question 6

Marcus owns and manages OLK,which is an all-equity firm.If he works 40 hours a week,the firm's annual EBIT will be $96,000.If he increases his hours to 45 a week,EBIT will increase to $108,000.The firm has a current value of $926,000.Marcus needs $250,000 to fund a new project.The firm can borrow the needed funds at an interest rate of 6 percent,or it can issue equity.Ignore taxes.Marcus will prefer

Accepted Answer

A)  debt with a 40-hour week as that option provides him with the highest cash flow.
B)  debt with a 45-hour week as his cash flow will be $11,000 greater than his next best option.
C)  equity with a 45-hour week as his cash flow will be $85,041.
D)  equity with a 40-hour week as that option provides him with the lowest cash flow.
E)  debt with a 45-hour week as his cash flow will be $7,959 higher than if he works 45 hours and shares his equity.F) All of the above
G) A) and B)

Question 7

Which one of the following claims on a firm would be paid first in a bankruptcy liquidation if the court adheres to the absolute priority rule?

Accepted Answer

A)  Government tax claims
B)  Wages,salaries,and commissions
C)  Consumer claims
D)  Preferred stockholder dividends
E)  Contributions to employee benefit plansF) B) and D)
G) A) and E)

Question 8

Which one of these represents an indirect cost of financial distress?

Accepted Answer

A)  Court fees paid to a bankruptcy court
B)  Legal fees paid to bankruptcy attorneys
C)  Additional accounting fees incurred by a firm in preparation for a liquidation
D)  A firm's supplier requiring payment in cash rather than offering its normal credit terms
E)  The expense incurred from hiring a consultant to evaluate a firm's dissolution optionsF) B) and C)
G) B) and D)

Question 9

Which one of these is a payment of a nonmarketed claim on a firm's cash flows?

Accepted Answer

A)  Dividend payment
B)  Principal repayment of a bond
C)  Repurchase of stock
D)  Payment of a customer's liability claim
E)  Payment of interest due on a bondF) C) and E)
G) A) and E)

Question 10

A firm that has a negative net worth is said to be

Accepted Answer

A)  experiencing accounting insolvency.
B)  in legal bankruptcy.
C)  experiencing technical insolvency.
D)  experiencing a business failure.
E)  in Chapter 11 bankruptcy reorganization.F) B) and D)
G) C) and D) A

Question 11

A legal attempt to financially restructure a failing firm so that it can continue operating as a going concern is called a

Accepted Answer

A)  merger.
B)  reorganization.
C)  liquidation.
D)  repurchase program.
E)  divestiture.F) C) and E)
G) C) and D)

Question 12

A firm may file for Chapter 11 bankruptcy I.in an attempt to gain a competitive advantage.
II) using a prepack.
III) while allowing the current management to continue running the firm.
IV) even though it is not insolvent.

Accepted Answer

A)  I and III only
B)  I,II,and IV only
C)  I and II only
D)  III and IV only
E)  I,II,III,and IVF) C) and E)
G) A) and C)

Question 13

Which one of these statements is correct for a levered firm?

Accepted Answer

A)  An increase in tax rates will decrease the value of the firm.
B)  An increase in financial distress costs increases the value of a firm.
C)  To obtain its maximum value,a firm should select an all-equity capital structure.
D)  The value of a firm is maximized when its cost of capital is also maximized.
E)  The optimal level of debt for a firm results in the value of that firm being maximized.F) B) and C)
G) C) and E)

Question 14

Which one of these statements is a correct implication of the pecking order theory?

Accepted Answer

A)  External financing should be limited to debt issues.
B)  The target debt level occurs when the marginal benefit of debt equals the marginal cost of debt.
C)  Companies like financial slack so they can reduce their external capital needs.
D)  Internally funded projects lower the market value of equity.
E)  Profitable firms use more debt.F) A) and B)
G) B) and E)

Question 15

The explicit costs,such as the legal expenses,associated with corporate default are classified as ________ costs.

Accepted Answer

A)  unlevered
B)  beta conversion
C)  direct bankruptcy
D)  indirect bankruptcy
E)  flotationF) B) and D)
G) A) and B) C

Question 16

Corporations in the U.S.tend to

Accepted Answer

A)  have extremely high debt-equity ratios.
B)  rely less on equity financing than they should.
C)  minimize taxes.
D)  underutilize debt.
E)  rely more heavily on bonds than stocks as the major source of financing.F) C) and D)
G) B) and E)

Question 17

Which of these will occur in a world with taxes and financial distress when a firm is operating at its optimal capital structure? I.The debt-equity ratio will be optimal.
II) The weighted average cost of capital will be at its minimal point.
III) The required return on assets will be at its maximum point.
IV) The increased benefit from additional debt will equal the increased bankruptcy costs of that debt.

Accepted Answer

A)  I and IV only
B)  II and III only
C)  I and II only
D)  II,III,and IV only
E)  I,II,and IV onlyF) C) and E)
G) C) and D)

Question 18

Which one of these actions by a firm is an example of milking the property? Assume the firm is in a period of financial distress.

Accepted Answer

A)  Repaying a bond that matured
B)  Paying the semiannual bond interest
C)  Paying an extra dividend
D)  Cutting a regular dividend
E)  Paying a regular dividendF) C) and D)
G) A) and B)

Question 19

In general,the capital structures of U.S.firms:

Accepted Answer

A)  tend to overweight debt in relation to equity.
B)  employ less debt when the firm requires large amounts of tangible assets.
C)  are constant over time on a firm-by-firm basis.
D)  tend to be those that maximize the use of each firm's available tax shelters.
E)  vary significantly across industries.F) B) and D)
G) A) and E)

Question 20

In principle,a firm becomes bankrupt when

Accepted Answer

A)  its equity value falls to zero.
B)  a lender refuses to lend any additional funds to the firm.
C)  its current ratio is less than one.
D)  it is one day late paying a payment to a creditor.
E)  its debt exceeds its equity.F) C) and D)
G) A) and B)

Exam 15: Capital Structure: Limits to the Use of Debt

Which one of the following statements concerning bankruptcy is correct?

Correct Answer
verified

As an attempt to avoid bankruptcy,a firm may

Correct Answer
verified

Indirect bankruptcy costs

Correct Answer
verified

The pecking order theory states that when external funds are required,a firm should

Correct Answer
verified

Which one of these best describes the relationship between bondholders and stockholders at a time when it appears the firm may be facing increased financial distress?

Correct Answer
verified
A

Correct Answer
verified

Which one of the following claims on a firm would be paid first in a bankruptcy liquidation if the court adheres to the absolute priority rule?

Correct Answer
verified

Which one of these represents an indirect cost of financial distress?

Correct Answer
verified

Which one of these is a payment of a nonmarketed claim on a firm's cash flows?

Correct Answer
verified

A firm that has a negative net worth is said to be

Correct Answer
verified
A

A legal attempt to financially restructure a failing firm so that it can continue operating as a going concern is called a

Correct Answer
verified

A firm may file for Chapter 11 bankruptcy I.in an attempt to gain a competitive advantage. II) using a prepack. III) while allowing the current management to continue running the firm. IV) even though it is not insolvent.

Correct Answer
verified

Which one of these statements is correct for a levered firm?

Correct Answer
verified

Which one of these statements is a correct implication of the pecking order theory?

Correct Answer
verified

The explicit costs,such as the legal expenses,associated with corporate default are classified as ________ costs.

Correct Answer
verified
C

Corporations in the U.S.tend to

Correct Answer
verified

Correct Answer
verified

Which one of these actions by a firm is an example of milking the property? Assume the firm is in a period of financial distress.

Correct Answer
verified

In general,the capital structures of U.S.firms:

Correct Answer
verified

In principle,a firm becomes bankrupt when

Correct Answer
verified

Exam 15: Capital Structure: Limits to the Use of Debt

Which one of the following statements concerning bankruptcy is correct?

Correct AnswerverifiedShow Answer

As an attempt to avoid bankruptcy,a firm may

Correct AnswerverifiedShow Answer

Indirect bankruptcy costs

Correct AnswerverifiedShow Answer

The pecking order theory states that when external funds are required,a firm should

Correct AnswerverifiedShow Answer

Which one of these best describes the relationship between bondholders and stockholders at a time when it appears the firm may be facing increased financial distress?

Correct AnswerverifiedA

Correct AnswerverifiedShow Answer

Which one of the following claims on a firm would be paid first in a bankruptcy liquidation if the court adheres to the absolute priority rule?

Correct AnswerverifiedShow Answer

Which one of these represents an indirect cost of financial distress?

Correct AnswerverifiedShow Answer

Which one of these is a payment of a nonmarketed claim on a firm's cash flows?

Correct AnswerverifiedShow Answer

A firm that has a negative net worth is said to be

Correct AnswerverifiedA

A legal attempt to financially restructure a failing firm so that it can continue operating as a going concern is called a

Correct AnswerverifiedShow Answer

A firm may file for Chapter 11 bankruptcy I.in an attempt to gain a competitive advantage. II) using a prepack. III) while allowing the current management to continue running the firm. IV) even though it is not insolvent.

Correct AnswerverifiedShow Answer

Which one of these statements is correct for a levered firm?

Correct AnswerverifiedShow Answer

Which one of these statements is a correct implication of the pecking order theory?

Correct AnswerverifiedShow Answer

The explicit costs,such as the legal expenses,associated with corporate default are classified as ________ costs.

Correct AnswerverifiedC

Corporations in the U.S.tend to

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of these actions by a firm is an example of milking the property? Assume the firm is in a period of financial distress.

Correct AnswerverifiedShow Answer

In general,the capital structures of U.S.firms:

Correct AnswerverifiedShow Answer

In principle,a firm becomes bankrupt when

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
A

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
A

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
C

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified