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[41].Which of the following would tend to increase a firm's

Question : [41].Which of the following would tend to increase a firm's : 1416421

 

[41].Which of the following would tend to increase a firm's target debt ratio, other things held constant?

 

a.The costs associated with filing for bankruptcy increase.

b.The corporate tax rate is increased.

c.The personal tax rate is increased.

d.The Federal Reserve tightens interest rates in an effort to fight inflation.

e.The company's stock price hits a new low.

 

[42].Which of the following statements is CORRECT?

 

a.As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS.

b.The optimal capital structure simultaneously maximizes EPS and minimizes the WACC.

c.The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price.

d.The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC.

e.The optimal capital structure simultaneously maximizes the stock price and minimizes the WACC.

 

[43].The firm’s target capital structure should do which of the following?

 

a.Maximize the earnings per share (EPS).

b.Minimize the cost of debt (rd).

c.Obtain the highest possible bond rating.

d.Minimize the cost of equity (rs).

e.Minimize the weighted average cost of capital (WACC).

 

[44].Which of the following statements is CORRECT?

 

a.A firm’s business risk is determined solely by the financial characteristics of its industry.

b.The factors that affect a firm’s business risk include industry characteristics and economic conditions, both of which are generally beyond the firm's control.

c.One of the benefits to a firm of being at or near its target capital structure is that this generally minimizes the risk of bankruptcy.

d.A firm’s financial risk can be minimized by diversification.

e.The amount of debt in its capital structure can under no circumstances affect a company’s EBIT and business risk.

[45].Which of the following statements is CORRECT?  As a firm increases the operating leverage used to produce a given quantity of output, this

 

a.normally leads to an increase in its fixed assets turnover ratio.

b.normally leads to a decrease in its business risk.

c.normally leads to a decrease in the standard deviation of its expected EBIT.

d.normally leads to a decrease in the variability of its expected EPS.

e.normally leads to a reduction in its fixed assets turnover ratio.

 

[46].A firm's CFO is considering increasing the target debt ratio, which would also increase the company’s interest expense.  New bonds would be issued and the proceeds would be used to buy back shares of common stock.  Neither total assets nor operating income would change, but expected earnings per share (EPS) would increase.  Assuming the CFO’s estimates are correct, which of the following statements is CORRECT?

 

a.Since the proposed plan increases the firm’s financial risk, the stock price might fall even if EPS increases.

b.If the plan reduces the WACC, the stock price is likely to decline.

c.Since the plan is expected to increase EPS, this implies that net income is also expected to increase.

d.If the plan does increase the EPS, the stock price will automatically increase at the same rate.

e.Under the plan there will be more bonds outstanding, and that will increase their liquidity and thus lower the interest rate on the currently outstanding bonds.

 

[47].Which of the following statements is CORRECT?

 

a.Increasing its use of financial leverage is one way to increase a firm’s return on investors’ capital (ROIC).

b.If a firm lowered its fixed costs but increased its variable costs by just enough to hold total costs at the present level of sales constant, this would increase its operating leverage.

c.The debt ratio that maximizes expected EPS generally exceeds the debt ratio that maximizes share price.

d.If a company were to issue debt and use the money to repurchase common stock, this would reduce its return on investors’ capital (ROIC).  (Assume that the repurchase has no impact on the company’s operating income.)

e.If a change in the bankruptcy code made bankruptcy less costly to corporations, this would tend to reduce corporations' debt ratios.

 

[48].Your firm has $500 million of investor-supplied capital, its return on investors’ capital (ROIC) is 15%, and it currently has no debt in its capital structure (i.e., wd = 0).  The CFO is contemplating a recapitalization where it would issue debt at an after-tax cost of 10% and use the proceeds to buy back some of its common stock, such that the percentage of common equity in the capital structure (wc) is 1 - wd.  If the company goes ahead with the recapitalization, its operating income, the size of the firm (i.e., total assets), total investor-supplied capital, and tax rate would remain unchanged.  Which of the following is most likely to occur as a result of the recapitalization?

 

a.The ROA would increase.

b.The ROA would remain unchanged.

c.The return on investors’ capital would decline.

d.The return on investors’ capital would increase.

e.The ROE would increase.

 

[49].Companies HD and LD have identical tax rates, total assets, total investor-supplied capital, and returns on investors’ capital (ROIC), and their ROICs exceed their after-tax costs of debt, rd(1 – T).  However, Company HD has a higher debt ratio and thus more interest expense than Company LD.  Which of the following statements is CORRECT?

 

a.Company HD has a higher net income than Company LD.

b.Company HD has a lower ROA than Company LD.

c.Company HD has a lower ROE than Company LD.

d.The two companies have the same ROA.

e.The two companies have the same ROE.

 

[50].Firms U and L each have the same amount of assets, investor-supplied capital, and both have a return on investors’ capital (ROIC) of 12%.  Firm U is unleveraged, i.e., it is 100% equity financed, while Firm L is financed with 50% debt and 50% equity.  Firm L’s debt has an after-tax cost of 8%.  Both firms have positive net income and a 35% tax rate.  Which of the following statements is CORRECT?

 

a.The two companies have the same times interest earned (TIE) ratio.

b.Firm L has a lower ROA than Firm U.

c.Firm L has a lower ROE than Firm U.

d.Firm L has the higher times interest earned (TIE) ratio.

e.Firm L has a higher EBIT than Firm U.

 

 

 

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