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Exam 15: Capital Structure Policy

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Question 21

Multiple Choice

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As a general rule,the optimal capital structure

A) maximises expected EPS and also maximises the price per share of ordinary shares.
B) minimises the interest rate on debt and also maximises the expected EPS.
C) minimises the required rate on equity and also maximises the share price.
D) maximises the price per share of ordinary shares and also minimises the weighted average cost of capital.

E) None of the above
F) A) and B)

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Question 22

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Financial structure includes long-term and short-term sources of funds.

A) True
B) False

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Question 23

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Briefly explain what the empirical evidence suggests about financial managers' actions as they relate to the capital structure theory.

Which of the following is part of a firm's financial structure but NOT a component of its capital structure?

The Trade-off Theory view of capital structure management says that the cost of capital curve is

Cornucopia's liabilities and equity are shown below: What is Cornucopia's debt ratio?

Which industry would you expect to have the highest Debt to Asset ratios?

Bigthurst Beverages total assets equal $360 million.The book value of Bigthurst's equity is $180 million.The market value of Bigthurst's equity is $ 250 million.The book value of the company's interest bearing debt is $120 million.Compute Bigthurst's Debt Ratio and Debt to Value Ratio.

The original form of the Modigliani and Miller Capital Structure Theorem

Merrimac Brewing company's total assets equal $18 million.The book value of Merrimac's equity is $6 million.Excess cash is $200,000.The market value of Merrimac's equity is $10 million.Its Debt to Enterprise Value ratio is .5.What is the book value of Merrimac's interest-bearing debt?

Most companies differ very little in their capital structures.

Abbot Corp has a debt ratio (debt to assets) of 20%.Management is wondering if its current capital structure is too conservative.Abbot Corp's present EBIT is $4.5 million,and profits available to ordinary shareholders are $2,910,600,with 600,000 shares of ordinary shares outstanding.If the firm were to instead have a debt ratio of 40%,additional interest expense would cause profits available to shareholders to decline to $2,851,200,but only 480,000 ordinary shares would be outstanding.What is the difference in EPS at a debt ratio of 40% versus 20%?

What is meant by the terms "favourable" and "unfavourable" leverage?

Other things the same,the use of debt financing reduces the firm's total tax bill,resulting in a higher total market value.

The trade-off theory of capital structure management assumes

Useful ratios for benchmarking a firm's capital structure include

The inclusion of bankruptcy costs and taxes in firm valuation

Weaknesses of the EBIT-EPS analysis include

The trade-off theory of capital structure suggests that if a firm moves from zero debt in its capital structure to moderate usage of debt,the result is an increase in a firm's

An optimal capital structure is achieved