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MCQ: Finance, Capital Structure, Leverage, Debt financing,

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Quiz 8
Chpt. 12 & 13: Capital Structure

1. If an airline began to experience reductions in ticket sales associated with news of its difficulty in servicing its debt (making debt payments), this would be an example of
a. agency problems
b. a tax shield
c. financial distress
d. managerial entrenchment
e. the pecking order view of capital structure

2.Which of the following assets would be most suitable to financing with relatively larger amounts of debt?
a. current assets, such as inventory
b. specialized long term assets
c. intangible long term assets
d. tangible (physical), standardized, and widely tradable fixed assets
e. This question is irrelevant because firms should avoid using debt whenever possible.

3. Existing shareholders generally consider leverage increasing events to be
a. good news
b. bad news

4. Empirical evidence suggests that larger firm (based on assets or sales) tend to have
a. more leverage
b. less leverage

5. Financial distress generally
a. increases firm value, since it signals to investors that the firm's managers are working for the shareholders
b. increases firm value, since it signals that the firm is operating extremely efficiently by not having too much liquidity
c. decreases firm value, since it means the firm may be losing sales revenue and/or the manager's focus may be distracted from the core business operations
d. decreases firm value, since it means the firm's product line is becoming obsolete
e. all of the above

6. Which of the following statements is (are) TRUE regarding the pecking order view of capital structure for financing new projects? (Please read all alternatives carefully before answering)
a. firms prefer borrowing (debt) over issuing more equity.
b. firms prefer internally generated funds over borrowing.
c. firms prefer equity over debt
d. firms prefer paying out all of the firm's earnings as dividends to existing shareholders to maximize shareholders' wealth
e. BOTH A & B.

7. All of the following are advantages of debt financing except which one?
a. interest is a tax-deductible expense
b. it allows for the use of "other people's money" in financing a business
c. the cost of debt financing is cheaper than equity financing.
d. it results in loss of ownership control of the business
e. Owners do not have to share the potential gains of the business, since debt only requires repayment of the amount owed

8. If a tax paying firm went from zero debt to successively higher levels of debt, why would you expect its stock price to rise? (Note: beyond a point, excessive use of debt would cause the stock price to then hit a peak, and then begin to decline.)
a. concentration of ownership (i.e., increased use of "other people's money" on operating the firm)
b. debt is a cheaper cost of capital, thus the use of debt decreases the financing expenses for the firm.
c. Debt payments, i.e., interest payments, are a tax-deductible expense, which creates a debt tax shield
d. All of the above
e. None of the above.

9. Which of the following industries would tend to generally have less debt in their capital structure mix?
a. transportation industry firms
b. high tech firms

10. According to the Miller & Modigliani (MM) Value of a Levered Firm with corporate taxes view (aka, the corporate tax view) of capital structure, the value of a levered firm increases as debt is increased.
a. True, because of a debt tax shield (corporate tax)
b. True, because debt increases potential financial distress
c. False, because the debt tax shield decreases value
d. False, because debt is bad for the firm
e. None of the above

11. Bonus: Assume the following scores for the components of this course: Exam=70%, Quiz Ave = 70%, Class participation = 95%, WSJ Group Activity = 95%, Article Review = 100%, Fundamental Skills Assessment Activity you get 12 of 15 correct (hint: see syllabus for implications of scoring 60% correct or better on this activity), Learning Reflection = 100%, Extra Credit submissions = 2. Based on these assumptions and the weights of the various components of your course portfolio, what would be your course score (number)? (Note: Based on this portfolio return process you should be able to estimate your individual current course grade under various assumptions.)
a. 81.2
b. 81.6
c. 80.8
d. 79.8
e. 78.6

Solution Preview

I have tried my best, but for bonus question, I also got stuck. Any additional information?

Quiz 8
Chpt. 12 & 13: Capital Structure

1. If an airline began to experience reductions in ticket sales associated with news of its difficulty in servicing its debt (making debt payments), this would be an example of
a. agency problems
b. a tax shield
c. financial distress
d. managerial entrenchment
e. the pecking order view of capital structure

Answer: C

Tight cash situation in which a business, household, or individual cannot pay the owed amounts on the due date.

Reference: http://www.investorwords.com/7302/financial_distress.html

2.Which of the following assets would be most suitable to financing with relatively larger amounts of debt?
a. current assets, such as inventory
b. specialized long term assets
c. intangible long term assets
d. tangible (physical), standardized, and widely tradable fixed assets
e. This question is irrelevant because firms should avoid using debt whenever possible.

Answer: D because if the company cannot pay, the creditors can sell the fixed assets to get money back.

3. Existing shareholders generally consider leverage increasing events to be
a. good news
b. bad news

Answer: A because it will give higher ROE to the shareholders.

4. Empirical evidence suggests that larger firm (based on assets or sales) tend to have
a. more leverage
b. less leverage

Answer: A because it will give higher ROE to the shareholders.

5. Financial distress generally
a. ...

Solution Summary

This solution is comprised of a detailed explanation to answer which of the following assets would be most suitable to financing with relatively larger amounts of debt.

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