11 May WHICH OF THE FOLLOWING WOULD BE CONSIDERED THE FIRM’S OPTIMAL CAPITAL STRUCTURE?
Which of the following would be considered the firm’s
optimal capital structure?
A) Stock Price = $25, Earnings Per Share = $10, Cost of
Equity Capital = 15%
B) Stock Price = $23, Earnings Per Share = $11, Cost of
Equity Capital = 18%
C) Stock Price = $24, Earnings Per Share = $12, Cost of
Equity Capital = 17%
D) Stock Price = $20, Earnings Per Share = $12, Cost of
Equity Capital = 20%
36) The market value of a leveraged firm is equal to the
market value of an unleveraged firm
A) plus the present value of tax shields minus the present
value of financial distress costs plus the present value of agency costs.
B) plus the present value of tax shields plus the present
value of financial distress costs plus the present value of agency costs.
C) minus the present value of tax shields minus the present
value of financial distress costs minus the present value of agency costs.
D) plus the present value of tax shields minus the present
value of financial distress costs minus the present value of agency costs.
37) The “threat hypothesis”
A) reduces management’s tendency to spend freely.
B) encourages management to use debt to further their own interests.
C) increases the agency problem.
D) increases agency monitoring costs.
Learning Objective 5
1) Given taxes and bankruptcy costs exist, as financial
increases, the weighted average cost of capital first decreases and then
increases.
2) The EBIT-EPS indifference point is the level of
production at which the company’s EBIT equals its EPS.
3) An EBIT-EPS analysis allows the decision maker to
visualize the impact of different financing plans on EPS over a range of EBIT
levels.
4) Because there are no fixed financing costs, a common
stock plan line in an EBIT-EPS analysis chart will have a less-steep slope than
will a bond-plan line.
5) One danger of EBIT-EPS analysis is that it ignores the
implicit cost of debt financing.
6) Above the EBIT-EPS indifference point a more heavily
levered financial plan will produce greater EPS.
7) Capital structure is the mix of the long-term sources of
funds used by the firm.
35) Which of the following would be considered the firm’s
optimal capital structure?A) Stock Price = $25, Earnings Per Share = $10, Cost of
Equity Capital = 15%B) Stock Price = $23, Earnings Per Share = $11, Cost of
Equity Capital = 18%C) Stock Price = $24, Earnings Per Share = $12, Cost of
Equity Capital = 17%D) Stock Price = $20, Earnings Per Share = $12, Cost of
Equity Capital = 20% 36) The market value of a leveraged firm is equal to the
market value of an unleveraged firmA) plus the present value of tax shields minus the present
value of financial distress costs plus the present value of agency costs.B) plus the present value of tax shields plus the present
value of financial distress costs plus the present value of agency costs.C) minus the present value of tax shields minus the present
value of financial distress costs minus the present value of agency costs.D) plus the present value of tax shields minus the present
value of financial distress costs minus the present value of agency costs.37) The “threat hypothesis”A) reduces management’s tendency to spend freely.B) encourages management to use debt to further their own interests.C) increases the agency problem.D) increases agency monitoring costs. Learning Objective 51) Given taxes and bankruptcy costs exist, as financial
increases, the weighted average cost of capital first decreases and then
increases. 2) The EBIT-EPS indifference point is the level of
production at which the company’s EBIT equals its EPS. 3) An EBIT-EPS analysis allows the decision maker to
visualize the impact of different financing plans on EPS over a range of EBIT
levels. 4) Because there are no fixed financing costs, a common
stock plan line in an EBIT-EPS analysis chart will have a less-steep slope than
will a bond-plan line. 5) One danger of EBIT-EPS analysis is that it ignores the
implicit cost of debt financing. 6) Above the EBIT-EPS indifference point a more heavily
levered financial plan will produce greater EPS. 7) Capital structure is the mix of the long-term sources of
funds used by the firm.
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