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The worth of a firm is maximized when the:A) expense of equity is maximized.B) Tax rate is zero.C) Levered price of funding is maximized.D) weighted average cost of resources is minimized.E) Debt-equity ratio is minimized.
The optimal resources structure has been completed when the:A) Debt-equity proportion is same to 1.B) weight of same is same to the load of debt.C) price of same is maximized provided a pretax expense of debt.D) Debt-equity ratio is such the the price of blame exceeds the cost of equity.E) Debt-equity ratio selected results in the lowest feasible weighed average price of capital.
In a human being with taxes and financial distress, when a certain is operating with the optimal resources structure the:A) Debt-equity proportion will be less than optimal.B) weight average expense of resources will be maximized.C) Firm will certainly be all-equity financed.D) compelled return top top assets will be at its maximum point. E) Increased advantage from added debt is equal to the increased bankruptcy costs of that debt.
The optimal resources structure the a firm _____ the marketable claims and also _____ the non-marketable claims against the cash flows of the firm.A) Minimizes; minimizesB) Minimizes; maximizesC) Maximizes; minimizesD) Maximizes; maximizesE) Equates; (leave blank)
One of the indirect costs of bankruptcy is the incentive toward under-investment. Under investment typically would an outcome in:A) The firm choosing all jobs with confident NPVs.B) The firm transforming down confident NPV tasks that would clearly be welcomed if the firm to be all-equity financed.C) Bondholders contributing the complete amount of any new investment, however both stockholders and bondholders share in the services of those investments.D) shareholder making decisions based on the ideal interests of the bondholders.E) The for sure accepting more projects than it would if the probability that bankruptcy to be ignored.
If a firm issues debt and includes safety covenants in the indenture then the firm\"s blame will probably be issued in ~ _____ similar debt without the covenants.A) A variable interest rate fairly than the fixed rate paid onB) A reduced interest rate thanC) A significantly greater interest rate thanD) an interest price equal to that ofE) A slightly greater interest price than
A for sure is right now valued in ~ $300 in a boom and $160 otherwise. The chance of a eight is 35 percent. The firm owes $200 to its debt holders. What is the worth of the firm to the shareholders?A) $0B) $35.00C) $27.50D) $209.00E) $9.00
The optimal resources structure will often tend to include more debt for firms with:A) The greatest depreciation deductions.B) The lowest marginal taxes rate.C) considerable tax shields from various other sources.D) reduced probability of jae won distress.E) less taxable income.
In general, the funding structures used by U.S. Firms:A) tend to overweight blame in relation to equity.B) room easily explained in state of revenue volatility.C) space easily defined by assessing the types of assets owned by the miscellaneous firms.D) tend to be those which maximize the use of the firm\"s available tax shelters.E) vary significantly throughout industries.
The MM concept with taxes means that that company should problem maximum debt. In practice, this does not occur because:A) debt is more risky than equity.B) Bankruptcy is a disadvantage come debt.C) The weighted average cost of capital is inversely regarded the debt-equity ratio.D) The weight average expense of funding is straight related to the debt-equity ratio.E) U.S. Regulations need the debt-equity ratio of publicly-traded this firm to be in the range of .3 come .7.
One that the indirect expenses of bankruptcy is the inspiration for supervisors to take big risks. When following this strategy:A) The firm will certainly rank all projects and select the project which results in the greatest expected firm value.B) Bondholders expropriate value from stockholders by selecting high-risk projects.C) stockholders expropriate value from bondholders by selecting high-risk projects.D) The firm will always select the lowest-risk task available.E) The firm will choose only all-equity financed projects.
Business risk: The danger of whether or no a for sure will be able to generate sufficient revenue indigenous sales to cover its operating expenses and make a profit. Points that get in sales variability, like CFs, industry conditions, market conditions, COGS, benefit margins, competition, in its entirety demand for its products, even if it is the firm\"s assets are concrete, etc.Financial risk: faces leverage and also debt financing, therefore it\"s whether or not a company can generate sufficient CFs come make attention payments. Interest price changes and also the load of debt in the company\"s funding structure.
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Definition: The price of financing rises with asymmetric info.Rules:1. Use internal financing as much as possible2. If exterior financing is needed, debt must be issued prior to equity
1. No target D/E ratio2. Profitable firms use less debt3. Companies prefer financial slack since they\"ll need to internally finance tasks in the future
With this firm taxes and also bankruptcy costs, the firm value is maximized whereby the ____________________________ indigenous the _______________________ is _____________________ by the _______________ in ______________________________.
Where the added benefit native the interest tax shield is simply offset through the boost in expected bankruptcy costs