Financial management chapter 2

Homemade leverage is:

• the incurrence of debt by a corporation in order to pay dividends to
  shareholders

• the exclusive use of debt to fund a corporate expansion project

• the borrowing or lending of money by individual shareholders as a means of
  adjusting their level of financial leverage

• best defined as an increase in a firm's debt-equity ratio

• the term used to describe the capital structure of a levered firm

Which one of the following states that the value of a firm is unrelated to the
firm's capital structure?

• Capital Asset Pricing Model

• M & M Proposition I

• M& M Proposition II

• Law of One Price

• Efficient Markets Hypothesis

Which one of the following states that a firm's cost of equity capital is directly
and proportionally related to the firm's capital structure?

• Capital Asset Pricing Model

• M & M Proposition I

• M & M Proposition II

• Law of One Price

• Efficient Markets Hypothesis

Which one of the following is the equity risk that is most related to the daily
operations of a firm?

• market risk

• systematic risk

• extrinsic risk

• business risk

• financial risk

Which one of the following is the equity risk related to a firm's capital structure
policy?

• market

• systematic

• extrinsic

• business

• financial

Butter & Jelly reduced its taxes last year by $350 by increasing its interest
expense by $1,000. Which of the following terms is used to describe this tax
savings?

• interest tax shield

• interest credit

• financing shield

• current tax yield

• tax-loss interest

The unlevered cost of capital refers to the cost of capital for a(n):

• private entity

• all-equity firm

• governmental entity

• private individual

• corporate shareholder

The explicit costs, such as legal and administrative expenses, associated with
corporate default are classified as _____ costs.

A.

B.

C.

D.

E.

• flotation

• issue

• direct bankruptcy

• indirect bankruptcy

• unlevered

The costs incurred by a business in an effort to avoid bankruptcy are classified
as _____ costs.

• flotation

• direct bankruptcy

• indirect bankruptcy

• financial solvency

• capital structure

By definition, which of the following costs are included in the term "financial
distress costs"?
I. direct bankruptcy costs
II. indirect bankruptcy costs
III. direct costs related to being financially distressed, but not bankrupt
IV. indirect costs related to being financially distressed, but not bankrupt

• I only

• III only

• I and II only

• III and IV only

• I, II, III, and IV