1- In Miller’s 1963 study, he noted that the deductibility of interest favors the use if debt financing, but the more favorable tax treatment of income from stocks lowers the required rates of return on stocks and thus favors the use of equity financing. Most observers believe that interest deductibility has the stronger effect, hence that our tax system favors the corporate use of debt. True or false?
2- In a perfect world, a firm would identify its optimal capital structure based on market values, raise capital so as to maintain that structure, and use the optimal percentages to calculate its WACC. However, the world is not perfect. It is possible to identify a precisely optimal structure, and given the volatility inherent in financial markets, it would be impossible to remain on target over time even if the optimal capital structure could be identified. As a result, most firms focus on a target debt-to-capital ratio range as opposed to a single number. True or false?
3- Given the following facts, use the Hamada equation to calculate the unlevered beta, bU. bL=1.25; T=35%; wd= 55% and wc=45%
1.15 b.1.30 c. 0.70 d. 1.00 e. 0.85
4- Which of the following factors does not influence a firm’s time-interest-earned ratio?
a- Amount of debt in the firm’s capital structure
b- A firm tax rate
c- A firm’s profitability
d- Interest rate on the firm’s debt
5- Interest is a tax deductible expense, and deductions are most valuable to firms with high tax rate. Therefore the higher a firm tax rate, the greater the advantage of debt. True or false?
6- Which of the following is not a factor that influences a firm’s capital structure decisions?
a- The firm’s tax position
b- The firm’s business risk
c- Management’s degree of conservatism or aggressiveness
d- The firm’s financial flexibility
e- None of these, all are factors that influence a firm’s capital structure decisions
7- Business risk depends on a number of factors. Which of the following does not influence business risk?
a- Amount of debt used by a firm: financial leverage
b- Foreign risk exposure
c- Extent to which costs are fixed: operating leverage
d- Ability to adjust output prices for changes in input costs
e- Demand variability
8- Given the following facts, use the Hamada equation to calculate the unlevered beta, bL. bU=0.6; T=35%; wd= 30% and wc=70%
1.25 b.1.00 c. 0.55 d. 1.08 e. 0.77
9- Other things held constant, the higher a firm’s financial leverage, the higher its business risk. True or false?
10- A leveraged buyout is a good way to reduce excess cash flow. In an LBO, debt is used to finance the purchase of a high percentage of the company’s shared. High debt payments after the LBO force managers to conserve cash by eliminating unnecessary expenditures. True or false?
11 Generally, low-leveraged industries have low coverage ratios, whereas capital-intensive industries that are heavily financed with debt have high coverage ratio. True or false?