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Managerial Finance Study Set 2
Quiz 12: Leverage and Capital Structure
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Question 121
True/False
A shift toward more fixed costs increases business risk,which in turn causes earnings before interest and taxes to increase by less for a given increase in sales.
Question 122
True/False
The more fixed cost financing a firm has in its capital structure,the greater is its financial leverage and risk.
Question 123
True/False
The asymmetric information explanation of capital structure suggests that firms will issue new equity only when the managers believe the firm's stock is overvalued; as a result,issuing new equity is considered a negative signal that will result in a decline in share price.
Question 124
True/False
The pecking order explanation of capital structure states that a hierarchy of financing exists for firms,in which new external debt financing is employed first,followed by retained earnings and finally by external equity financing.
Question 125
True/False
In general,a firm's theoretical optimal capital structure is that which balances the tax benefits of equity financing against the increase probability of bankruptcy that results from its use.
Question 126
True/False
Holding all other factors constant,a firm that is subject to a greater level of business risk should employ more total leverage than an otherwise equivalent firm that is subject to a lesser level of business risk.
Question 127
True/False
Financial risk refers to fluctuations in a firm's cash flows that occur because the firm uses financing sources like debt and preferred stock.
Question 128
True/False
Because of the extensive research conducted in recent years in the area of capital structure theory,it is now possible for financial managers to pinpoint with great accuracy a firm's optimal capital structure.
Question 129
True/False
The asymmetric information explanation of capital structure suggests that firms will issue new debt only when the managers believe the firm's stock is overvalued; as a result,issuing new debt is considered a negative signal that will result in a decline in share price.
Question 130
True/False
Asymmetric information results when managers of a firm have more information about the firm's operations and future prospects than investors have.
Question 131
True/False
Despite the extensive research conducted in recent years in the area of capital structure theory,it is not yet possible to provide financial managers with a specified methodology for use in determining a firm's optimal capital structure.
Question 132
True/False
In general,the greater a firm's operating leverage,the higher its business risk.
Question 133
True/False
In general,non-U.S.companies have much higher debt ratios than their U.S.counterparts because financial markets are much more developed in the United States than elsewhere.
Question 134
True/False
Effective capital structure decisions can lower the cost of capital,resulting in higher NPVs and more acceptable projects,thereby increasing the value of a firm.
Question 135
True/False
Business risk is the risk to the firm of being unable to cover required financial obligations.
Question 136
True/False
Business risk is the risk that is reflected in fluctuations of the firm's cash flows before considering any debt financing.
Question 137
True/False
In general,a firm's theoretical optimal capital structure is that which balances the tax benefits of debt financing against the increase probability of bankruptcy that result from its use.
Question 138
True/False
The pecking order explanation of capital structure states that a hierarchy of financing exists for firms,in which retained earnings are employed first,followed by debt financing and finally by external equity financing.