There was an upward trend in the ratio of the book value of debt to the book value of debt and equity throughout the 1990s. Some of this was due to the repurchasing of stock. The market value ratio of debt to debt and equity exhibited no upward trend. This can be explained by ?
1. the change in the accounting rules of the period.
2. the difference between tax accounting and accounting for financial accounting purposes.
3. a large increase in the market value of equity that was greater than the increase in debt.
4. none of the above.
A levered firm is a company that ?
1. is financed by common stock.
2. has some debt in the capital structure.
3. has all equity in the capital structure.
4. is all of the above.
5. is none of the above.
Technically speaking, a long-term corporate debt offering that features a specific attachment to property is generally called a ?
2. long-term liability.
3. preferred liability.
In analyzing the financial decisions of a firm, it turns out that the typical firm ?
1. has more capital expenditure opportunities with positive NPVs than financing opportunities.
2. has about the same number of capital expenditure opportunities and financing opportunities.
3. has more financing opportunities with positive NPVs than capital expenditure opportunities.
4. has no opportunities for positive NPVs in either capital expenditures or in financing.
Please answer the following questions, by chosing the best answer below it.
Financial managers can create value through financing decisions that?
1. reduce costs or increase subsidies.
2. increase the product prices.
3. create a new security.
4. do both a and b.
5. do both a and c.
The change in firm value in the presence of corporate taxes is?
1. positive, as equityholders gain the tax shield on the debt interest.
2. positive, as equityholders face a lower effective tax rate.
3. negative because of the increased risk of default and fewer shares outstanding.
4. negative because of a reduction of equity outstanding.
The solution has explanations for multiple choice questions.