Question : Multiple Choice:  True/False [1].A firm's business risk largely determined by the : 1416417

Multiple Choice:  True/False

 

^[1].A firm's business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses.

 

a.True

b.False

 

^[2].Financial risk refers to the extra risk borne by stockholders as a result of a firm's use of debt as compared with their risk if the firm had used no debt.

 

a.True

b.False

 

^[3].A firm’s capital structure does not affect its free cash flows as discussed in the text, because FCF reflects only operating cash flows, which are available to service debt, to pay dividends to stockholders, and for other purposes.

 

a.True

b.False

 

^[4].If a firm borrows money, it is using financial leverage.

 

a.True

b.False

 

^[5].Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

 

a.True

b.False

 

^[6].The graphical probability distribution of ROE for a firm that uses financial leverage would tend to be more peaked than the distribution if the firm used no leverage, other things held constant.

 

a.True

b.False

 

^[7].Provided a firm does not use an extreme amount of debt, operating leverage typically affects only EPS, while financial leverage affects both EPS and EBIT.

 

a.True

b.False

 

^[8].The trade-off theory states that capital structure decisions involve a tradeoff between the costs and benefits of debt financing.

 

a.True

b.False

 

^[9].Different borrowers have different risks of bankruptcy, and if a borrower goes bankrupt, its lenders will probably not get back the full amount of funds that they loaned.  Therefore, lenders charge higher rates to borrowers judged to be more likely to go bankrupt.

 

a.True

b.False

 

^[10].Modigliani and Miller (MM) won Nobel Prizes for their work on capital structure theory.

 

a.True

b.False