In this problem, we admit only one real-world factor in an otherwise ideal capital market. This real world factor is corporate taxation; specifically that interest payments on debt are deductible while dividend payments are not deductible. Suppose Delaware East, Inc has until now been an all-equity firm with a market value of $100 mn. Now, […]
The inexpensive nature of long-term debt in a firm’s capital structure is due to the fact that ________. A) the equity holders are the true owners of the firm B) equity capital has a fixed return C) interest payments are tax-deductible D) equity holders have a higher position in the priority of claims […]
An increase in current assets increases net working capital, thereby reducing the risk of insolvency. Indicate whether the statement is true or false ANSWER TRUE
The conversion of current assets ________. A) from cash to receivables to inventory provides the cash used to pay non-current liabilities B) from inventory to receivables to marketable securities provides the cash used to buy plant and equipment C) from inventory to receivables to cash provides the cash used to pay current liabilities D) from […]
A firm’s ________ is the mix of long-term debt and equity utilized by the firm, which may significantly affect its value by affecting return and risk. A) dividend policy B) capital budget C) capital structure D) working capital ANSWER C
Capacity surpluses result in (i) product prices and (ii) profit margins. (i) (ii) a. lower higher b. higher lower c. lower lower d. higher higher ANSWER C
The lower risk nature of long-term debt in a firm’s capital structure is due to the fact that ________. A) the debt holders are the true owners of the firm B) equity capital has a fixed return C) creditors have a higher position in the priority of claims D) dividend payments are tax-deductible […]
Holding all other factors constant, a firm that is subject to a greater level of business risk should employ less total leverage than an otherwise equivalent firm that is subject to a lesser level of business risk. Indicate whether the statement is true or false ANSWER TRUE
The tradeoff in the traditional tradeoff theory of optimal capital structure is between: a. agency costs of debt and information asymmetry costs of debt. b. the tax benefit of debt and the expected costs of future financial distress. c. the tax benefit of debt and agency costs of debt. ANSWER B
Assuming that the level of total assets remains unchanged, the effect of a decrease in the ratio of current assets to total assets is an increase in a firm’s risk of insolvency. Indicate whether the statement is true or false ANSWER TRUE
