The optimal capital structure is that structure which:
reduces overall leverage
reduces or eliminates only financial leverage
gives the highest stock price
provides the best risk versus return scenario for investors
carries extra options for timing and future events.
Select the best combination below of risk as it relates to a company's sales and a company's profits.
financial risk / business risk
foreign exchange risk / interest rate risk.
business risk / financial risk.
business risk / interest rate risk.
interest rate risk / investment risk.
Operating leverage targets
the percent of costs that are fixed
the usage of labor.
Fill in the blank. Considering one industry, all firms must have _________ capital structures to be optimal.
any number of combinations of
Capital rationing is:
the allocation of available capital to projects best suited to be undertaken, at the present time.
Applying an even distribution of capital; all departments get the same funding.
Applying a distribution of capital based on the % of profits generated by each department.
none of the above.
As operating leverage increases, all things being equal,
the lower the break even point will be
variable costs per unit will decrease
the higher the sales volume needed to break even.
variable costs per unit will increse
all of the above.
If the analytical results of projects "N" and "M" are:
M: NPV = $450, IRR 12%
N: NPV = $500, IRR = 12%
Which of the following would be correct?
Your company has an historical return for its shareholders at 15%; therefore, both projects are rejected.
If they are mutually exclusive, you would reject "N".
If they are not mutually exclusive, you can accept both because they have a positive NPV.
Reject both because there is no way both can have the same IRR with different NPV's.
"A" and "C" are correct answers.
Which of the following is not considered a "real option"?.
The concept of sunk costs is most associated with which of the following:
abandonment costs or options to abandon if you decide to do something else.
Working capital needed to start a business
Net after tax but before interest and principal payments.
none of these!
Which of the following is not an example of a real option?
Quitting a job
Leaving school before you graduate
Paying off a debt obligation early
dropping one quiz grade in this course
renting an asset instead of buying that asset
What is the after-tax cost of debt for a firm in the 35% tax bracket that pays 15% on its debt?
A project has the following projected outcomes in dollars: $250, $350, and $500. The probabilities of their outcomes are 25%, 50%, and 25% respectively. What is the expected value of these outcomes?
Financial risk refers to the:
risk of owning equity securities.
risk faced by equity holders when debt is used.
general business risk of the firm.
possibility that interest rates will increase.
A firm's capital structure is represented by its mix of:
liabilities and equity.
assets and liabilities.
assets, liabilities and equity.
Risk is usually measured as the :
variability of outcomes around some expected value.
probability of expected values.
potential expected loss.
An increase in a firm's financial leverage will:
increase the variability in earnings per share.
reduce the operating risk of the firm.
increase the value of the firm in a non-MM world.
increase the WACC.
Which of the following could SIGNAL to investors that the future prospects of the company are bright?
Borrow significantly more money (increase financial leverage).
Sell new equity shares in the open market.
Sell stock the company had listed as Treasury Stock.
Pay down debt.
all of the above.
Trade off theory of leverage relates
returns to stock holders as bond leverage increases
returns to both owners and debt holders as leverage increases
operating versus financial aspects of leverage
commission costs associated with equity (stock. trading versus bond trading
tax benefits of debt versus increase chance of defaulting on debt.
Which of the following is an example of restructuring the firm?
Dividends are increased from $1 to $2 per share.
A new investment increases the firm's business risk.
New equity is issued and the proceeds repay debt.
A new Board of Directors is elected to the firm.
The stability of a firm's operating income is the focus of:
weighted-average cost of capital.
uses the risk free rate
relates risk versus return
uses a premium for added risk
all of the above
none of the above
Optimal Capital structure is:
easily attained; just plug in variables to the formula.
achieved through trial and error by leveraging financial assets.
static once the optimal point is reached.
a great academic discussion but cannot be determined in dynamic financial markets for any given period of time.
constant, but each industry, as defined by NAICS, has its own debt/equity mix.
Asymmetric information occurs when:
all parties have complete information
one party has less information than the other.
all analysts agree about future earning predictions
No one has any information
none of the above© BrainMass Inc. brainmass.com October 25, 2018, 1:34 am ad1c9bdddf
This solution is comprised answers to finance multiple choice mostly in the capital structure topicl.
Capital Structure: Trade Off Theory
"Optimal leverage refers to the amount of debt in a firm's capital structure, which minimizes the firm's cost of capital and thus maximizes its market value".
Please read the attached documents and discuss the above statement by illustrating how the optimal mix of debt and equity in capital structure is attained where there is a trade-off between the expected benefits and costs of debt financing.
Do NOT references/quote anything from the attached documents, please use other external sources.
And please use Harvard referencing.