Learning Module 6 Capital Structure

What is the weighted-average cost of capital (WACC) primarily used for in corporate finance?

Which of the following best explains why the cost of equity is usually greater than the cost of debt?

A firm has 40 million in market debt and 60 million in market equity. The before-tax cost of debt is 6%, the cost of equity is 11%, and the marginal tax rate is 25%. What is the firm's WACC (rounded to two decimals)?

Under Modigliani–Miller Proposition I with no taxes, which statement is correct?

Which adjustment to the cost of debt is commonly made when computing WACC in jurisdictions where interest is tax-deductible?

Given an unlevered firm with perpetual net income to equity of 5,000 and r0 (all-equity cost) of 10%, what is the firm's value under MM without taxes?

Under MM Proposition II without taxes, how does increasing leverage affect the firm's WACC?

A firm operating in a jurisdiction with corporate tax rate t issues debt D. According to MM with corporate taxes, how much does firm value increase from the tax shield (ignoring distress)?

Which of these is a key reason firms in the startup stage tend to prefer equity financing over debt?

Which factor would most likely LOWER a firm's cost of debt all else equal?

Which statement correctly characterizes the pecking-order theory of capital structure?

Which of these is an indirect cost of financial distress?

According to the static trade-off theory, the optimal capital structure is reached when:

Which of the following would likely increase a firm's cost of equity ceteris paribus?

Why do analysts often use market-value weights rather than book-value weights when computing WACC for valuation?

A firm has EBIT of 30, interest expense of 6, and marginal tax rate of 30%. Which statement about interest coverage and tax shield is correct?

Which of the following best describes the 'free cash flow hypothesis' related to capital structure?

Which of the following financing instruments is most debt-like for WACC calculations?

Which top-down factor most directly affects both cost of debt and cost of equity across many firms simultaneously?

Which is an implication of MM with corporate taxes but ignoring distress costs?

An analyst wants to use a firm's stated target capital structure of D/E = 0.7 for WACC. What are the implied weights for debt and equity (D/(D+E) and E/(D+E))?

Which of the following is evidence of managerial inertia in capital allocation decisions?

If a firm's assets are highly tangible and have active secondary markets (e.g., aircraft), how does this affect expected costs of financial distress?

Which of the following best represents 'signaling' in capital structure decisions?

An analyst computing a firm's WACC includes preferred stock. How should preferred dividends be treated when calculating the blended cost of capital?

Which corporate life-cycle stage is most likely to rely on convertible debt as a financing source?

Which of the following is NOT typically a reason managers set capital structure target ranges rather than a precise fixed ratio?

Which of these asset profiles makes a company more likely to be able to borrow secured debt at lower spreads?

Which is a common reason issuers express target capital structures using book values rather than market values?

Which analytical adjustment is most appropriate when a firm's cash flows are highly volatile due to operating leverage?

Which capital-structure-related action by management is most likely to be interpreted as a positive signal to investors about future prospects?

What does a high interest coverage ratio indicate about a firm's ability to use debt?

A firm with steady subscription revenues, low capital intensity, and high gross margins is likely to have which financing preference?

If a firm increases its debt from 10 million to 20 million and the marginal present value of expected financial distress increases by 1.0 million while the tax shield benefit is 3.0 million, what is the net effect on firm value (ignoring other changes)?

Which of the following is a cognitive error mentioned in the chapter that can impair capital allocation decisions?

Which of the following is an example of a real option in capital investment decision-making?

When should an analyst prefer NPV over IRR for project evaluation?

A company increases its leverage. According to MM with taxes, which of the following is true about the WACC trend (ignoring distress)?

Which of the following actions would most likely reduce a firm's weighted-average cost of capital, all else equal?

Which of the following is NOT typically an issuer-specific factor in setting capital structure?

Which of the following best describes a practical reason managers might prefer book-value targets for capital structure?

How does the presence of convertible debt typically affect the measurement of a firm's leverage?

Which practice helps management validate assumptions used in capital allocation and improve future decisions?

Which metric often signals limited debt capacity and higher risk for new borrowings?

Which statement about ROIC is correct relative to WACC and capital structure decisions?

Which of the following is an example of a behavioral bias in capital allocation mentioned in the chapter?

Which of the following actions increases the present value of a firm's tax shield, holding other variables unchanged?

Which scenario would most likely increase a firm's expected probability of financial distress?

Which WACC weight set is most appropriate for valuing a potential new project that the company plans to finance in proportion to its target capital structure?

Which statement summarizes the chapter's guidance on choosing capital structure to maximize firm value?