Question 1

Which of the following approaches appears to be ideal for studying the relationship between capital structure and company value?

Accepted Answer

A)  An examination of bankruptcy costs incurred by failed companies.
B)  An examination of companies with tax losses carried forward.
C)  An examination of transactions in which one type of security is exchanged for another.
D)  An examination of capital-raising transactions by companies from different industries.E) A) and B)
F) None of the above

Question 2

Evidence suggests that the introduction of the imputation tax system has resulted in which of the following changes to capital structure:

Accepted Answer

A)  no change in the capital structure of companies.
B)  an increase in corporate financial leverage than is typical under the classical system.
C)  a decrease in corporate financial leverage than is typical under the classical system.
D)  a decrease in the proportion of profits paid out as dividends.E) B) and C)
F) All of the above

Question 3

Company financing can be considered as a _____________ problem by using the fact that different investors have different tastes,preferences and levels of wealth to explain the coexistence of securities which differ in terms of characteristics such as risk,return,tax treatment and voting rights.

Accepted Answer

The answer of Company financing can be considered as a...

Question 4

The problem of being forced to choose between foregoing a positive NPV project and seeing the share price fall because of a share issue can be overcome by maintaining:

Accepted Answer

A)  stable dividends.
B)  target leverage levels.
C)  reserve borrowing capacity.
D)  a company's debt-equity ratio to less than 50 per cent.E) B) and C)
F) A) and B) C

Question 5

Evidence from surveys of CFOs provides support to the _____________ theory.

Accepted Answer

The answer of Evidence from surveys of CFOs provides support...

Question 6

Which of the following statements is true?

Accepted Answer

A)  A company's financial leverage can't affect investment decisions and its operating efficiency.
B)  Banks and finance companies have much higher debt/equity ratios than those of retailers and manufacturers.
C)  Banks and finance companies have much lower debt/equity ratios than those of retailers and manufacturers.
D)  None of the given options.E) B) and D)
F) A) and B) B

Question 7

Which of the following statements is consistent with the trade-off theory?

Accepted Answer

A)  Costs of financial distress are likely to be most serious for companies with significant intangible assets.
B)  A negative relationship exists between leverage and profitability.
C)  Companies with mostly intangible assets are likely to borrow more.
D)  A positive relationship exists between leverage and non-debt tax shields.E) A) and B)
F) A) and C)

Question 8

Barclay and Smith (1996) investigated the significance of two features of debt--maturity and priority--and found that:

Accepted Answer

A)  companies with low ratios of market value to book value tend to use debt of shorter maturity and lower priority.
B)  companies with high ratios of market value to book value tend to use debt of longer maturity and higher priority.
C)  companies with low ratios of market value to book value tend to use debt of longer maturity and higher priority.
D)  companies with high ratios of market value to book value tend to use debt of shorter maturity and higher priority.E) None of the above
F) A) and D)

Question 9

An important prediction of the pecking order theory is that an announcement of a new share issue will cause the company's:

Accepted Answer

A)  share price to fall.
B)  share price to rise.
C)  share price to fall by a minimum of 10%.
D)  share price to rise by a minimum of 10%.E) None of the above
F) B) and D)

Question 10

___________ risk includes the possibility that a sudden change of government may be followed by expropriation of foreign-owned assets or a difficulty to transfer dividends out of the country.

Accepted Answer

The answer of ___________ risk includes the possibility that a...

Question 11

The pecking order theory:

Accepted Answer

A)  predicts that announcement of a new share issue will cause the company's share price to fall.
B)  implies that a company's leverage will depend on the difference between its operating cash flow and its investment needs over time.
C)  predicts that,other things being equal,a company's leverage will be negatively related to its profitability.
D)  All of the given options.E) A) and C)
F) All of the above

Question 12

Evidence from companies that make 'dual issues' of debt and equity is inconsistent with the predictions of trade-off theory.

Accepted Answer

A) True 
 B)False

Question 13

Assume that LoPine Ltd,a US-based company (which has a classical taxation system) ,borrows $10 million at an interest rate of 15 per cent and uses the funds to repurchase shares worth $10 million.Further,assume that the company tax rate is 35 per cent,the marginal income tax rate is 30 per cent and the average tax rate on equity income is 12 per cent.Calculate the net tax savings per year.

Accepted Answer

A)  $192 000
B)  $182 000
C)  $188 000
D)  $172 000E) A) and B)
F) B) and C)

Question 14

Maintaining reserve borrowing capacity allows companies the benefit of:

Accepted Answer

A)  financing projects,particularly for those that operate in low-growth industries.
B)  maintaining a constant dividend payout policy.
C)  overcoming the need to raise funds to finance projects from a new share issue.
D)  not rejecting negative NPV projects.E) A) and B)
F) B) and C)

Question 15

Mehrotra,Mikkelson and Partch (2003) found that:

Accepted Answer

A)  higher leverage is related to higher profitability,lower variability of industry operating income and a greater proportion of tangible assets.
B)  higher leverage is related to lower profitability.
C)  higher leverage is related to negative profitability.
D)  higher leverage is related to higher profitability and higher variability of industry operating income.E) A) and B)
F) All of the above

Question 16

The trade-off theory implies that the actual debt ratios will be described by:

Accepted Answer

A)  a target model where companies have a leverage target.
B)  an adjustment model where companies adjust their leverage.
C)  a target model where companies have a leverage target but make no adjustments.
D)  a target-adjustment model where companies have a leverage target and make gradual adjustments to it.E) C) and D)
F) A) and B) D

Question 17

For companies that are unable to make immediate use of interest deductions,borrowing is likely to have:

Accepted Answer

A)  a positive net tax advantage.
B)  a net tax disadvantage.
C)  a positive impact on financial distress because of the tax deductibility of interest on debt.
D)  a benefit of achieving an optimal capital structure.E) C) and D)
F) A) and D)

Question 18

Barclay,Smith and Watts (1995) found that:

Accepted Answer

A)  the relationship between leverage and the market-book value ratio was highly significant in a statistical sense but was not 'economically' significant.
B)  taxes do not have an important effect on corporate leverage decisions.
C)  their findings are consistent with the pecking order theory because they show that leverage is negatively related to profitability.
D)  leverage was positively related to the tangibility of assets and negatively related to the market-book value ratio in seven countries.E) C) and D)
F) B) and C)

Question 19

Studies,which show that taxes affect marginal financing decisions,show that:

Accepted Answer

A)  the present value of interest tax savings is positive and influences the choice of company debt ratios.
B)  taxes have a predictable effect on financing strategy.
C)  taxes are important for tactical financing decisions.
D)  all of the given options.E) A) and B)
F) None of the above

Question 20

Which of the following provides evidence that is consistent with the pecking order theory?

Accepted Answer

A)  An unusually profitable firm in an industry with relatively slow growth will end up with an unusually high debt/equity ratio.
B)  An unusually profitable firm in an industry with relatively high growth will end up with an unusually low debt/equity ratio.
C)  An unprofitable firm in an industry with relatively slow growth will end up with a low debt/equity ratio.
D)  Companies' past needs for external finance,rather than a target capital structure,determine capital structures.E) B) and D)
F) B) and C)

Exam 13: Capital Structure Decisions

Which of the following approaches appears to be ideal for studying the relationship between capital structure and company value?

Correct Answer
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Evidence suggests that the introduction of the imputation tax system has resulted in which of the following changes to capital structure:

Correct Answer
verified

Company financing can be considered as a _____________ problem by using the fact that different investors have different tastes,preferences and levels of wealth to explain the coexistence of securities which differ in terms of characteristics such as risk,return,tax treatment and voting rights.

Correct Answer
verified

The problem of being forced to choose between foregoing a positive NPV project and seeing the share price fall because of a share issue can be overcome by maintaining:

Correct Answer
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C

Evidence from surveys of CFOs provides support to the _____________ theory.

Correct Answer
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Which of the following statements is true?

Correct Answer
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B

Which of the following statements is consistent with the trade-off theory?

Correct Answer
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Barclay and Smith (1996) investigated the significance of two features of debt--maturity and priority--and found that:

Correct Answer
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An important prediction of the pecking order theory is that an announcement of a new share issue will cause the company's:

Correct Answer
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___________ risk includes the possibility that a sudden change of government may be followed by expropriation of foreign-owned assets or a difficulty to transfer dividends out of the country.

Correct Answer
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The pecking order theory:

Correct Answer
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Evidence from companies that make 'dual issues' of debt and equity is inconsistent with the predictions of trade-off theory.

Correct Answer
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Correct Answer
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Maintaining reserve borrowing capacity allows companies the benefit of:

Correct Answer
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Mehrotra,Mikkelson and Partch (2003) found that:

Correct Answer
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The trade-off theory implies that the actual debt ratios will be described by:

Correct Answer
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D

For companies that are unable to make immediate use of interest deductions,borrowing is likely to have:

Correct Answer
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Barclay,Smith and Watts (1995) found that:

Correct Answer
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Studies,which show that taxes affect marginal financing decisions,show that:

Correct Answer
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Which of the following provides evidence that is consistent with the pecking order theory?

Correct Answer
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Exam 13: Capital Structure Decisions

Which of the following approaches appears to be ideal for studying the relationship between capital structure and company value?

Correct AnswerverifiedShow Answer

Evidence suggests that the introduction of the imputation tax system has resulted in which of the following changes to capital structure:

Correct AnswerverifiedShow Answer

Company financing can be considered as a _____________ problem by using the fact that different investors have different tastes,preferences and levels of wealth to explain the coexistence of securities which differ in terms of characteristics such as risk,return,tax treatment and voting rights.

Correct AnswerverifiedShow Answer

The problem of being forced to choose between foregoing a positive NPV project and seeing the share price fall because of a share issue can be overcome by maintaining:

Correct AnswerverifiedC

Evidence from surveys of CFOs provides support to the _____________ theory.

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedB

Which of the following statements is consistent with the trade-off theory?

Correct AnswerverifiedShow Answer

Barclay and Smith (1996) investigated the significance of two features of debt--maturity and priority--and found that:

Correct AnswerverifiedShow Answer

An important prediction of the pecking order theory is that an announcement of a new share issue will cause the company's:

Correct AnswerverifiedShow Answer

___________ risk includes the possibility that a sudden change of government may be followed by expropriation of foreign-owned assets or a difficulty to transfer dividends out of the country.

Correct AnswerverifiedShow Answer

The pecking order theory:

Correct AnswerverifiedShow Answer

Evidence from companies that make 'dual issues' of debt and equity is inconsistent with the predictions of trade-off theory.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Maintaining reserve borrowing capacity allows companies the benefit of:

Correct AnswerverifiedShow Answer

Mehrotra,Mikkelson and Partch (2003) found that:

Correct AnswerverifiedShow Answer

The trade-off theory implies that the actual debt ratios will be described by:

Correct AnswerverifiedD

For companies that are unable to make immediate use of interest deductions,borrowing is likely to have:

Correct AnswerverifiedShow Answer

Barclay,Smith and Watts (1995) found that:

Correct AnswerverifiedShow Answer

Studies,which show that taxes affect marginal financing decisions,show that:

Correct AnswerverifiedShow Answer

Which of the following provides evidence that is consistent with the pecking order theory?

Correct AnswerverifiedShow Answer

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C

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B

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D

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