Question 1

Which one of the following statements is correct concerning a Chapter 7 bankruptcy?

Accepted Answer

A)  A firm reorganizes its operations in an effort to return to being a viable concern.
B)  A trustee will assume control of the firm's assets until those assets can be liquidated.
C)  Chapter 7 bankruptcies are always involuntary on the part of the firm.
D)  The claims of creditors are paid prior to the bankruptcy administrative costs.
E)  The firm generally issues new shares of stock prior to coming out of bankruptcy.F) D) and E)
G) B) and C)

Question 2

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) A) and E)
G) A) and B)

Question 3

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) A) and E)
G) A) and D)

Question 4

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 D)
G) B) and E)

Question 5

The complete termination of a firm as a going business concern is called a

Accepted Answer

A)  merger.
B)  repurchase program.
C)  liquidation.
D)  divestiture.
E)  reorganization.F) None of the above
G) C) and D)

Question 6

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) D) and E)
G) B) and D)

Question 7

Which one of these relationships will exist if a firm is operating under its optimal capital structure?

Accepted Answer

A)  The net present value of the firm will equal zero.
B)  The firm's cost of capital will equal the risk-free rate.
C)  The present value of the financial distress costs will equal the present value of the tax shield on debt.
D)  The value of the firm will equal the maximum value obtainable according to the MM theories.
E)  The firm will be financed with equal amounts of long-term debt and equity.F) C) and E)
G) A) and B)

Question 8

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) A) and E)
G) C) and D)

Question 9

In a world with corporate taxes,MM theory implies that that all firms should

Accepted Answer

A)  maintain a constant value.
B)  decrease in value as the leverage of the firm increases.
C)  choose an all-debt capital structure.
D)  select the capital structure that maximizes the firm's WACC.
E)  select the capital structure that equates the marginal cost of debt with the marginal benefits.F) None of the above
G) All of the above

Question 10

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) B) and D)
G) All of the above

Question 11

The legal proceeding for liquidating or reorganizing a firm operating in default is called a

Accepted Answer

A)  tender offer.
B)  bankruptcy.
C)  merger.
D)  takeover.
E)  proxy fight.F) B) and C)
G) A) and B)

Question 12

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 E)
G) C) and E)

Question 13

Custer's has bonds outstanding with a face value of $98,000 that are selling at par.It also has 12,000 shares of stock outstanding that are selling for $25.90 a share.The all-equity value of the firm is $398,000.The tax rate is 35 percent.By what amount has the value of the firm been decreased by the expected bankruptcy costs? Assume there are no other claims on the firm.

Accepted Answer

A)  $21,300
B)  $18,900
C)  $23,500
D)  $0
E)  $20,750F) D) and E)
G) A) and E)

Question 14

The Sawmill expects to generate a cash flow of $59,000 next year if the economy booms and $46,000 if it does not.The probability of a boom is 20 percent.The firm has debt of $52,000 that is due in 1 year and has a current market value of $48,700.The firm plans to close after this coming year.The current promised pretax return on debt is ________ percent,and the expected pretax return on debt is ________ percent.

Accepted Answer

A)  6.78; 1.16
B)  6.78; -3.08
C)  5.49; 1.16
D)  5.49; -2.67
E)  6.27; -3.08F) A) and C)
G) B) and C)

Question 15

The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as ________ costs.

Accepted Answer

A)  indirect bankruptcy
B)  direct bankruptcy
C)  financial solvency
D)  capital structure
E)  flotationF) B) and C)
G) A) and C)

Question 16

The optimal capital structure has been achieved when the

Accepted Answer

A)  weight of equity is equal to the weight of debt.
B)  debt-equity ratio selected results in the lowest possible weighted average cost of capital.
C)  firm is totally financed with debt.
D)  debt-equity ratio is such that the cost of debt exceeds the cost of equity.
E)  cost of equity is maximized.F) A) and E)
G) B) and C)

Question 17

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) A) and E)
G) All of the above

Question 18

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) A) and D)
G) A) and E)

Question 19

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 E)
G) C) and D)

Question 20

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) All of the above
G) A) and E)

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

The complete termination of a firm as a going business concern is called a

Correct Answer
verified

The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as ________ costs.

Correct Answer
verified

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

Correct Answer
verified

In a world with corporate taxes,MM theory implies that that all firms should

Correct Answer
verified

Which one of these relationships will exist if a firm is operating under its optimal capital structure?

Correct Answer
verified

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

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

Correct Answer
verified

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

Correct Answer
verified

The optimal capital structure has been achieved when the

Correct Answer
verified

Correct Answer
verified

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

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

In principle,a firm becomes bankrupt when

Correct Answer
verified

Correct Answer
verified

Which one of the following statements is correct concerning a Chapter 7 bankruptcy?

Correct Answer
verified

The legal proceeding for liquidating or reorganizing a firm operating in default is called a

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 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

Correct Answer
verified

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

The complete termination of a firm as a going business concern is called a

Correct AnswerverifiedShow Answer

The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as ________ costs.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In a world with corporate taxes,MM theory implies that that all firms should

Correct AnswerverifiedShow Answer

Which one of these relationships will exist if a firm is operating under its optimal capital structure?

Correct AnswerverifiedShow Answer

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

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The optimal capital structure has been achieved when the

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

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 AnswerverifiedShow Answer

In principle,a firm becomes bankrupt when

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following statements is correct concerning a Chapter 7 bankruptcy?

Correct AnswerverifiedShow Answer

The legal proceeding for liquidating or reorganizing a firm operating in default is called a

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 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

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified