Chapter 17-CF

Chapter 17-CF

University

10 Qs

quiz-placeholder

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Chapter 17-CF

Chapter 17-CF

Assessment

Quiz

Business

University

Easy

Created by

Lê Vy

Used 1+ times

FREE Resource

10 questions

Show all answers

1.

MULTIPLE CHOICE QUESTION

1 min • 1 pt

When firms issue more debt, the present value of the tax shield on debt _____ while the present value of financial distress costs:

decreases; decreases

increases; increases.

decreases; remains constant

decreases; increases.

2.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

The free cash flow hypothesis states:

that firms with greater free cash flow will pay more in dividends thereby reducing the risk of financial distress

that firms with greater free cash flow should issue new equity to help minimize the wasting of resources by managers.

that issuing debt requires interest and principal payments to be paid thereby reducing the potential of management to waste resources

that firms with higher levels of free cash flow should reward their managers with bonuses

3.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

The pecking order states that firms should:

always issue equity to avoid financial distress costs.

issue new equity first.

always issue debt then the market won't know when management thinks the security is overvalued.

use internal financing first.

4.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

Which one of these best exemplifies “milking the property”?

a firm demanding a premium to be acquired without a proxy fight

a firm with high financial distress paying additional dividends

an all-equity firm repurchasing shares

a firm with high financial distress using expected dividends to repay debt

5.

MULTIPLE CHOICE QUESTION

3 mins • 1 pt

Assume the corporate tax rate is 34 percent, the personal tax rate on interest income is 15 percent, and the personal tax rate on dividends is 10 percent. If the firm earns $5 per share in taxable income and pays out 40 percent of its earnings, how much will a shareholder receive in aftertax income?

$1.188

$1.232

$1.782

$1.232

6.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

A firm is currently valued at $175 in a boom and $110 in a recession. The chance of either economic state occurring is 50 percent. The firm owes $120 to its debt holders. What is the value of the firm to the shareholders in a recession?

$22.50

$55.00

$27.50

$0

7.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

According to the trade-off theory, firms should balance the tax benefits of debt with the costs of financial distress. What does this imply about a firm's capital structure?

Firms should only issue debt when interest rates are low.

Firms should avoid debt at all costs.

Firms should aim for a mix of debt and equity to optimize their value.

Firms should only use equity financing.

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