Multiple-choice questions: leverage, debt, intangibles, free cash flow, Miller's model
I need help with the following multiple-choice:
Which of the following industries would tend to have the highest leverage?
Which of the following is true?
a.A firm with low anticipated profit will likely take on a high level of debt.
b.A successful firm will probably take on zero debt.
c.Rational firms raise debt levels when profits are expected to decline.
d.Rational investors are likely to infer a higher firm value from a zero debt level.
e.Investors will generally view an increase in debt as a positive sign for the firm's value.
Studies have found that firms with high proportions of intangible assets are likely to use ____________debt compared with firms with low proportions of intangible assets.
b.the same amount of
d.either more or the same amount of
e.any amount of debt
The free cash flow hypothesis states:
a.that firms with greater free cash flow will pay more in dividends reducing the risk of financial distress.
b.that firms with greater free cash flow should issue new equity to force managers to minimize wasting resources and to work harder.
c.that issuing debt requires interest and principal payments reducing the potential of management to waste resources.
d.Both A and C.
e.Both B and C.
In Miller's model, when the quantity [(1-Tc)(1-Ts) = (1-Tb)], then:
a.the firm should hold no debt.
b.the value of the levered firm is greater than the value of the unlevered firm.
c.the tax shield on debt is exactly offset by higher personal taxes paid on interest income.
d.the tax shield on debt is exactly offset by higher levels of dividends.
e.the tax shield on debt is exactly offset by higher capital gains.
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