Question 1

What role do industries play in the capital structure choice for a firm?

Accepted Answer

Industries are found to have distinct patterns in their capital structures.For example,software companies such as Microsoft are far less levered than are automobile manufacturers such as Ford Motor.

Question 2

Which of the following do firms consider in the choice of securities issued?
A)The tax consequences of the chosen security.
B)The transactions costs of the chosen security.
C)Whether the chosen security will have a fair price in the market.
D)All of the above are considered.

Accepted Answer

Firms consider all of these factors when choosing securities to issue. The tax consequences of a chosen security can impact the firm's bottom line, while transaction costs can impact the issuing price and overall profitability. Additionally, the firm wants to select a security that will have a fair price in the market to ensure that the offering is successful.

Question 3

Equity in a firm with no debt is called unlevered equity.

Accepted Answer

Unlevered equity refers to the equity in a company that has not taken on any debt. This means that the company is not obligated to make interest payments or repay principal amounts to lenders, which can affect the value of the equity.

Question 4

Financial managers prefer to choose the same debt level no matter which industry they operate in.

Accepted Answer

Financial managers need to consider the industry-specific risks and requirements while choosing the debt level, which may vary from industry to industry.

Question 5

What considerations should managers have while deciding on their capital structure?

Accepted Answer

The answer of What considerations should managers have while deciding...

Question 6

With perfect capital markets,because different choices of capital structure offer a benefit to investors,they affect the value of the firm.

Accepted Answer

In a perfect capital market, the choice of capital structure does not affect the value of the firm as investors can create their own personal leverage using borrowed funds. Therefore, the benefit of alternative capital structures is not relevant in a perfect capital market.

Question 7

Which of the following statements is FALSE?
A)The relative proportions of debt,equity,and other securities that a firm has outstanding constitute its capital structure.
B)The most common choices are financing through equity alone and financing through a combination of debt and equity.
C)The project's net present value (NPV)represents the value to the new investors of the firm created by the project.
D)When corporations raise funds from outside investors,they must choose which type of security to issue.

Accepted Answer

The project's net present value (NPV) represents the value of the project itself, not the value to new investors of the firm created by the project. The NPV measures the present value of cash flows generated by the project minus the cost of the project.

Question 8

A project will give a one-time cash flow of $25,000 after one year.If the project risk requires a return of 12%,what is the levered value of the firm with perfect capital markets?
A)$19,882
B)$22,321
C)$22,000
D)more information needed

Accepted Answer

The levered value of the firm (V_L) can be calculated as V_L = V_U + TC where V_U is the unlevered value of the firm, T is the tax rate, and C is the present value of the interest tax shield. In this case, there is no debt, so V_U = $25,000/0.12 = $208,333. The tax rate is not given, but since the question assumes perfect capital markets, it can be assumed that the firm pays corporate taxes, so the tax shield is 0. Thus, V_L = $208,333.

Question 9

A project will give a one-time cash flow of $20,000 after one year.If the project risk requires a return of 10%,what is the levered value of the firm with perfect capital markets?
A)$18,182
B)$20,000
C)$19,000
D)more information needed

Accepted Answer

The levered value of the firm is the present value of the future cash flow. The present value is calculated as $20,000 / (1 + 0.10) = $18,182.

Question 10

Investment cash flows are independent of financing choices in a
A)market with frictions.
B)perfect capital market.
C)setting with frictions in investment returns.
D)firm with leverage.

Accepted Answer

In a perfect capital market, investment cash flows are not affected by financing choices, as all capital is assumed to be available at the same cost. In settings with frictions, such as market imperfections or information asymmetries, financing choices can affect investment cash flows. In a firm with leverage, financing choices can also affect investment cash flows due to the impact of interest payments and debt repayment obligations. Therefore, the best choice is B.

Question 11

Equity in a firm with no debt is called
A)levered equity.
B)unlevered equity.
C)risk-free equity.
D)risky equity.

Accepted Answer

Equity in a firm with no debt is called unlevered equity, as there is no leverage or debt financing involved. Levered equity refers to equity in a firm that uses debt to finance its operations. Risk-free equity and risky equity are not commonly used terms in finance.

Question 12

What is the capital structure of a firm?

Accepted Answer

The answer of What is the capital structure of a...

Question 13

Equity in a firm with debt is called
A)levered equity.
B)risk-free equity.
C)unlevered equity.
D)risky equity.

Accepted Answer

Equity in a firm with debt is called levered equity because it is impacted by the presence of debt. This means that the value and risk associated with the equity are influenced by the amount of debt the firm has.

Question 14

MM Proposition I states that in a perfect capital market the total value of a firm is equal to the market value of the ________ generated by its assets.
A)earnings after taxes
B)earnings after interest
C)cash flows after taxes
D)free cash flows

Accepted Answer

According to MM Proposition I, the total value of a firm is not affected by its capital structure in a perfect capital market. In other words, the value of the firm is determined solely by the cash flows generated by its assets, which is equivalent to the free cash flows. Therefore, choice D is the best answer. Earnigns after taxes (choice A) and earnings after interest (choice B) are not equivalent to free cash flows as they do not take into consideration the capital structure of the firm. Cash flows after taxes (choice C) may include non-operating cash flows, which are not generated by the firm's assets and therefore would not be relevant to the firm's value.

Question 15

The relative proportions of debt,equity,and other securities that a firm has outstanding constitute its
A)capital structure.
B)leverage.
C)retained earnings.
D)paid out capital.

Accepted Answer

Capital structure refers to the mix of debt, equity, and other securities that a company uses to finance its operations. It is a crucial aspect of a company's financial management and affects its overall risk profile and ability to meet its financial obligations. Leverage refers specifically to the use of debt to finance a company's operations and is a component of its capital structure. Retained earnings and paid out capital are related to a company's earnings and distributions to shareholders, respectively, but are not synonymous with its capital structure.

Question 16

With perfect capital markets,the total value of a firm should not depend on its capital structure.

Accepted Answer

With perfect capital markets, the cost of capital is the same for all financing options, and therefore, the total value of a company should not depend on its capital structure, as the value of its cash flows and assets are the same regardless of how they are financed.

Question 17

Even if two firms operate in the same industry,they may prefer different choices of debt-equity ratios.

Accepted Answer

The optimal debt-equity ratio for a firm depends on its specific financial needs, risk tolerance, and financial goals. Thus, even if two firms operate in the same industry, they may have different preferences for their capital structure based on their unique circumstances.

Question 18

A firm will give a one-time cash flow of $22,000 after one year.If the project risk requires a return of 11%,what is the levered value of the firm with perfect capital markets?
A)$18,182
B)$20,000
C)$19,820
D)more information needed

Accepted Answer

The levered value of the firm is equal to the present value of the one-time cash flow, which is $22,000, discounted at the required return of 11%. Therefore, levered value = $22,000 / 1.11 = $19,820. Option C is the closest option.

Question 19

A firm's ________ ratio is the fraction of the firm's total value that corresponds to debt.
A)debt-to-equity
B)asset
C)debt-to-value
D)liability

Accepted Answer

The debt-to-value ratio measures the amount of debt relative to the total value of the firm. It is calculated by dividing the total debt by the total value of the firm. The debt-to-equity ratio measures the amount of debt relative to equity, while the asset ratio measures the amount of debt relative to assets. Liability is a broad term that includes all the financial obligations owed by the firm, but it does not provide a specific measure of the firm's debt structure.

Question 20

A financial manager makes a choice of the amount and source of capital based on how the choice will impact
A)debt-equity ratio.
B)debt value.
C)earnings per share.
D)firm value.

Accepted Answer

The financial manager's primary goal is to maximize the firm's value, which is ultimately driven by the profitability of the firm's investments. Therefore, the best choice would be the one that maximizes firm value, regardless of the impact on the debt-equity ratio, debt value, or earnings per share.

Quiz 16: Capital Structure

What role do industries play in the capital structure choice for a firm?

Which of the following do firms consider in the choice of securities issued?

Equity in a firm with no debt is called unlevered equity.

Financial managers prefer to choose the same debt level no matter which industry they operate in.

What considerations should managers have while deciding on their capital structure?

With perfect capital markets,because different choices of capital structure offer a benefit to investors,they affect the value of the firm.

Which of the following statements is FALSE?

A project will give a one-time cash flow of $25,000 after one year.If the project risk requires a return of 12%,what is the levered value of the firm with perfect capital markets?

A project will give a one-time cash flow of $20,000 after one year.If the project risk requires a return of 10%,what is the levered value of the firm with perfect capital markets?

Investment cash flows are independent of financing choices in a

Equity in a firm with no debt is called

What is the capital structure of a firm?

Equity in a firm with debt is called

MM Proposition I states that in a perfect capital market the total value of a firm is equal to the market value of the ________ generated by its assets.

The relative proportions of debt,equity,and other securities that a firm has outstanding constitute its

With perfect capital markets,the total value of a firm should not depend on its capital structure.

Even if two firms operate in the same industry,they may prefer different choices of debt-equity ratios.

A firm will give a one-time cash flow of $22,000 after one year.If the project risk requires a return of 11%,what is the levered value of the firm with perfect capital markets?

A firm's ________ ratio is the fraction of the firm's total value that corresponds to debt.

A financial manager makes a choice of the amount and source of capital based on how the choice will impact