11 May WHICH OF THE FOLLOWING WOULD NOT BE A PART OF A FIRM’S CAPITAL STRUCTURE?
The optimal capital structure is the funds mix that
will
A) minimize the use of debt.
B) achieve an equal proportion of debt, preferred stock,
and common equity.
C) minimize the firm’s composite cost of capital.
D) maximize total leverage.
26) The Modigliani and Miller hypothesis suggests that
capital structure doesn’t matter. All of the following conditions need to be
met for this hypothesis to be true EXCEPT
A) corporate income is not subject to taxation.
B) capital structure consists only of stocks and bonds.
C) securities are traded in perfect or efficient markets.
D) all corporate net income is paid out as dividends.
27) Assuming no corporate taxes, the independence
hypothesis suggests that a firm’s weighted average cost of capital will
A) remain constant regardless of capital structure because
the cost of debt and the cost of equity are the same.
B) remain constant because the cost of equity will be
increasing as the amount of debt increases due to the increased risk.
C) increase proportionally with the increase in the amount
of debt a firm uses.
D) decrease proportionally with the increase in the amount
of debt a firm uses.
28) Which of the following statements is MOST correct
concerning a corporation’s optimal capital structure?
A) The optimal capital structure maximizes the present
value of the interest tax shield.
B) The optimal capital structure occurs at the point where
the market value of the levered firm is maximized.
C) The optimal capital structure minimizes the present
value of financial distress costs and agency costs.
D) The optimal capital structure occurs where the present
value of the interest tax shield equals the present value of the firm’s
bankruptcy costs.
29) One component of a firm’s financial structure which is
NOT a component of its capital structure is
A) common stock.
B) accounts payable.
C) long-term debt.
D) preferred stock.
30) According to the moderate view of capital costs and
financial leverage, as the use of debt financing increases
A) the cost of capital continuously decreases.
B) the cost of capital remains constant.
C) the cost of capital continuously increases.
D) there is an optimal level of debt financing.
31) When deciding upon how much debt financing to employ,
most practitioners would cite which of the following as the most important
influence on the level of the debt ratio?
A) providing a borrowing reserve
B) maintaining desired bond rating
C) ability to adequately meet financing charges
D) exploiting advantages of financial leverage
32) Optimal capital structure is
A) the mix of permanent sources of funds used by the firm
in a manner that will maximize the company’s common stock price.
B) the mix of all items that appear on the right-hand side
of the company’s balance sheet.
C) the mix of funds that will minimize the firm’s cost of
equity capital.
D) the mix of funds that will maximize the firm’s interest
tax shield.
33) Which of the following would NOT be a part of a firm’s
capital structure?
A) short-term notes payable
B) long-term bonds
C) preferred stock
D) common stock
34) A firm’s optimal capital structure occurs where?
A) EPS are maximized, and WACC is minimized.
B) Stock price is maximized, and EPS are maximized.
C) Stock price is maximized, and WACC is maximized.
D) WACC is minimized, and stock price is maximized.
25) The optimal capital structure is the funds mix that
willA) minimize the use of debt.B) achieve an equal proportion of debt, preferred stock,
and common equity.C) minimize the firm’s composite cost of capital.D) maximize total leverage. 26) The Modigliani and Miller hypothesis suggests that
capital structure doesn’t matter. All of the following conditions need to be
met for this hypothesis to be true EXCEPTA) corporate income is not subject to taxation.B) capital structure consists only of stocks and bonds.C) securities are traded in perfect or efficient markets.D) all corporate net income is paid out as dividends. 27) Assuming no corporate taxes, the independence
hypothesis suggests that a firm’s weighted average cost of capital willA) remain constant regardless of capital structure because
the cost of debt and the cost of equity are the same.B) remain constant because the cost of equity will be
increasing as the amount of debt increases due to the increased risk.C) increase proportionally with the increase in the amount
of debt a firm uses.D) decrease proportionally with the increase in the amount
of debt a firm uses. 28) Which of the following statements is MOST correct
concerning a corporation’s optimal capital structure?A) The optimal capital structure maximizes the present
value of the interest tax shield.B) The optimal capital structure occurs at the point where
the market value of the levered firm is maximized.C) The optimal capital structure minimizes the present
value of financial distress costs and agency costs.D) The optimal capital structure occurs where the present
value of the interest tax shield equals the present value of the firm’s
bankruptcy costs. 29) One component of a firm’s financial structure which is
NOT a component of its capital structure isA) common stock.B) accounts payable.C) long-term debt.D) preferred stock. 30) According to the moderate view of capital costs and
financial leverage, as the use of debt financing increasesA) the cost of capital continuously decreases.B) the cost of capital remains constant.C) the cost of capital continuously increases.D) there is an optimal level of debt financing. 31) When deciding upon how much debt financing to employ,
most practitioners would cite which of the following as the most important
influence on the level of the debt ratio?A) providing a borrowing reserveB) maintaining desired bond ratingC) ability to adequately meet financing chargesD) exploiting advantages of financial leverage 32) Optimal capital structure isA) the mix of permanent sources of funds used by the firm
in a manner that will maximize the company’s common stock price.B) the mix of all items that appear on the right-hand side
of the company’s balance sheet.C) the mix of funds that will minimize the firm’s cost of
equity capital.D) the mix of funds that will maximize the firm’s interest
tax shield. 33) Which of the following would NOT be a part of a firm’s
capital structure?A) short-term notes payableB) long-term bondsC) preferred stockD) common stock 34) A firm’s optimal capital structure occurs where?A) EPS are maximized, and WACC is minimized.B) Stock price is maximized, and EPS are maximized.C) Stock price is maximized, and WACC is maximized.D) WACC is minimized, and stock price is maximized.
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