Sunday, November 10, 2019

Which one of the following has the greatest tendency to increase the percentage of debt included in the optimal capital structure of a firm?

Which one of the following is a direct bankruptcy cost? 
 
A. 
company CEO's time spent in bankruptcy court

B. 
maintaining cash reserves

C. 
maintaining a debt-equity ratio that is lower than the optimal ratio

D. 
losing a key company employee

E. 
paying an outside accountant fees to prepare bankruptcy reports
Refer to section 16.5

39.
If a firm has the optimal amount of debt, then the: 
 
A. 
direct financial distress costs must equal the present value of the interest tax shield.

B. 
value of the levered firm will exceed the value of the firm if it were unlevered.

C. 
value of the firm is minimized.

D. 
value of the firm is equal to VL + TC × D.

E. 
debt-equity ratio is equal to 1.0.
Refer to section 16.6

40.
Which one of the following has the greatest tendency to increase the percentage of debt included in the optimal capital structure of a firm? 
 
A. 
exceptionally high depreciation expenses

B. 
very low marginal tax rate

C. 
substantial tax shields from other sources

D. 
low probabilities of financial distress

E. 
minimal taxable income
Refer to section 16.6


41.
The capital structure that maximizes the value of a firm also: 
 
A. 
minimizes financial distress costs.

B. 
minimizes the cost of capital.

C. 
maximizes the present value of the tax shield on debt.

D. 
maximizes the value of the debt.

E. 
maximizes the value of the unlevered firm.
Refer to section 16.6

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