FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 13: Capital Structure

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 41

Multiple Choice

Review LaterAdd Note

Review Later

Based on the information below, what is the firm's optimal capital structure?

A) Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.
B) Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.
C) Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
D) Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.
E) Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.

F) A) and B)
G) A) and C)

Correct Answer

verified

Show Answer

Question 42

Multiple Choice

Review LaterAdd Note

Review Later

Which of the following statements is CORRECT?

A) Generally, debt ratios do not vary much among different industries, although they do vary among firms within a given industry.
B) Electric utilities generally have very high common equity ratios because their revenues are more volatile than those of firms in most other industries.
C) Airline companies tend to have very volatile earnings, and as a result they generally have high target debt-to-equity ratios.
D) Wide variations in capital structures exist both between industries and among individual firms within given industries. These differences are caused by differing business risks and also managerial attitudes.
E) Since most stocks sell at or very close to their book values, book value capital structures are typically adequate for use in estimating firms' weighted average costs of capital.
Multiple Choice: Problems
Some of these problems are conceptually difficult, and they are designated as HARD. Others are not conceptually difficult, but they require a good bit of arithmetic. Please take this into account when making up timed tests.

F) B) and E)
G) A) and B)

Correct Answer

verified

Show Answer

Question 43

True/False

Review LaterAdd Note

The Modigliani and Miller (MM) articles implicitly assumed, among other things, that outside stockholders have the same information about a firm's future prospects as its managers. That was called "symmetric information," and it is questionable. The introduction of "asymmetric information" led to the development of the "signaling" theory of capital structure, which postulated that firms are reluctant to issue new stock because investors will interpret such an act as a signal that the firm's managers are worried about its future. Other actions give off different signals, and the end result is that capital structure is affected by managers' perceptions about how their financing decisions will affect investors' views of the firm and thus its value.

Modigliani and Miller's first article led to the conclusion that capital structure is "irrelevant" because it has no effect on a firm's value.

Southeast U's campus book store sells course packs for $15.00 each, the variable cost per pack is $11.00, fixed costs for this operation are $300,000, and annual sales are 100,000 packs. The unit variable cost consists of a $4.00 royalty payment, VR, per pack to professors plus other variable costs of VO = $7.00. The royalty payment is negotiable. The book store's directors believe that the store should earn a profit margin of 10% on sales, and they want the store's managers to pay a royalty rate that will produce that profit margin. What royalty per pack would permit the store to earn a 10% profit margin on course packs, other things held constant?

Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?

Your firm's debt ratio is only 5.00%, but the new CFO thinks that more debt should be employed. She wants to sell bonds and use the proceeds to buy back and retire common shares so the percentage of common equity in the capital structure (wc) = 1 - wd. Other things held constant, and based on the data below, if the firm increases the percentage of debt in its capital structure (wd) to 60.0%, by how much would the ROE change, i.e., what is ROENew - ROEOld?

Which of the following statements is CORRECT?

Your company, which is financed entirely with common equity, plans to manufacture a new product, a cell phone that can be worn like a wristwatch. Two robotic machines are available to make the phone, Machine A and Machine B. The price per phone will be $250.00 regardless of which machine is used to make it. The fixed and variable costs associated with the two machines are shown below, along with the capital (all equity) that must be invested to purchase each machine. The expected sales level is 25,000 units. Your company has tax loss carry-forwards that will cause its tax rate to be zero for the life of the project, so T = 0. How much higher or lower will the project's ROE be if you select the machine that produces the higher ROE, i.e., what is ROEB - ROEA? (Hint: Since the firm uses no debt and its tax rate is zero, ROE = EBIT/Required investment.)

A major contribution of the Miller model is that it demonstrates, other things held constant, that

Which of the following would tend to increase a firm's target debt ratio, other things held constant?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Business risk is affected by a firm's operations. Which of the following is NOT directly associated with (or does not directly contribute to) business risk?

Dyson Inc. currently finances with 20.0% debt (i.e., wd = 20%) , but its new CFO is considering changing the capital structure so wd = 60.0% by issuing additional bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure (wc) = 1 - wd. Given the data shown below, by how much would this recapitalization change the firm's cost of equity? (Hint: You must unlever the current beta and then use the unlevered beta to solve the problem.)

If a firm borrows money, it is using financial leverage.

Companies HD and LD have the same total assets, total investor-supplied capital, operating income Which of the following statements is CORRECT?

Firms U and L each have the same amount of assets, investor-supplied capital, and both have a return on investors' capital (ROIC) of 12%. Firm U is unleveraged, i.e., it is 100% equity financed, while Firm L is financed with 50% debt and 50% equity. Firm L's debt has an after-tax cost of 8%. Both firms have positive net income and a 35% tax rate. Which of the following statements is CORRECT?

The firm's target capital structure should do which of the following?

Assume that you and your brother plan to open a business that will make and sell a newly designed type of sandal. Two robotic machines are available to make the sandals, Machine A and Machine B. The price per pair will be $20.00 regardless of which machine is used. The fixed and variable costs associated with the two machines are shown below. What is the difference between the break-even points for Machines A and B? (Hint: Find BEB - BEA)