Reading 31: Capital Structure

Which stage of a company's life cycle is typically characterized by the exclusive use of equity financing?

According to Modigliani and Miller's Proposition I without taxes, the value of a firm is:

Under MM Proposition II without taxes, as a company increases its use of debt financing, the cost of equity:

In the context of the static trade-off theory, the optimal capital structure is achieved when:

Which of the following is considered an indirect cost of financial distress?

When estimating a firm's target capital structure for WACC calculation, an analyst should prioritize using:

According to the pecking order theory, which source of financing is most preferred by managers?

Which of the following stakeholder groups is most likely to prefer a company to have lower financial leverage?

A firm has a debt-to-equity ratio of 0.5. If the cost of equity is 12 percent, the cost of debt is 6 percent, and there are no taxes, what is the weighted average cost of capital (WACC)?

Under MM Proposition I with taxes, the value of a levered firm is equal to the value of an unlevered firm plus:

Which factor is most likely to reduce the conflict of interest between managers and shareholders regarding risk-taking?

In the context of agency costs, 'bonding costs' refer to:

A company with high operating leverage and high earnings volatility is most likely in which life cycle stage?

If investors have homogeneous expectations, they:

Information asymmetry costs generally increase with the proportion of:

In a market with corporate taxes but no bankruptcy costs, the optimal capital structure is:

Which of the following creates a 'tax shield' for a company?

Based on the static trade-off theory, a company with higher business risk should generally have:

Typically, the cost of debt financing for a firm is:

Which of the following is a characteristic of debt securities that reduces the conflict of interest between debtholders and shareholders?

According to the pecking order theory, issuing new external equity is viewed by investors as a signal that:

Agency costs of equity arise from the conflict of interest between:

What effect does increased financial leverage generally have on a firm's Return on Equity (ROE)?

Debt ratings are primarily determined by analyzing a company's ability to:

If a firm has a significant amount of tangible, liquid assets, it will likely have:

A 'growth cyclical' firm is best described as having:

Which of the following is most likely to reduce the agency costs of equity?

In the MM Proposition II (No Taxes) graph, the WACC line is:

How do inflation expectations affect a firm's decision to issue long-term fixed-rate debt?

Which of the following is considered a 'defensive' industry?

When comparing public debtholders to private lenders (banks), private lenders generally have:

Which country's legal system is generally considered to provide better protection for shareholders?

Management of a company may choose to issue equity instead of debt when:

If a company has a Cost of Equity (Ke) of 15 percent and an after-tax Cost of Debt (Kd) of 5 percent, what happens to WACC as leverage increases under MM Proposition II (No Taxes)?

Why might a company maintain a lower debt level than the theoretical optimum?

In the Static Trade-Off Theory, the value of a levered firm decreases when:

Monitoring costs are associated with:

Which of the following is an example of an industry with high operating leverage?

Preferred stock dividends have priority over:

A firm follows a policy of matching the maturities of its debt to the lives of its assets. This suggests the firm is:

Which of the following is true regarding debt ratings and the cost of capital?

When a firm has 'investment grade' debt, its rating is typically:

Assuming a tax rate of 30 percent, what is the value of the tax shield for a firm with $1 million in debt?

Market share stability is a factor affecting:

Which of the following describes the relationship between the cost of debt (rd) and the cost of equity (re)?

Expansionary monetary policy resulting in low interest rates is most likely to encourage firms to:

Which stakeholder group generally has an asymmetric payoff profile (limited upside, 100 percent downside)?

What is the primary reason book values are often used in practice for debt ratios despite the theoretical preference for market values?

If a firm has a target capital structure of 60 percent equity and 40 percent debt, and the value of its equity rises significantly due to market price increases, the firm will likely:

A 'hot issue' in the context of primary markets usually refers to: