Group Presentation 5: Capital Structure 2 Flashcards
A firm reduced its taxes last year by increasing its interest expense. Which term is used to describe this tax savings?
A. Interest credit B. Interest tax shield C. Tax-loss interest D. Homemade leverage shield Ans: B
If a firm has other tax shields, its taxable earnings will be_ and will rely_ heavily on the interest tax shield.
A. Decreased, more B. Decreased, less C. Increased, less D. Increased, more Ans: B
Based on MM Proposition I w/ taxes, value of firm increases when the debt increases due to the interest tax shield.
True
According to the trade-off theory, the capital structure is a trade-off between:
A. Tangible and intangible asset risk B. Tax shields and equity financing C. High and low target debt ratios D. Tax savings (tax shield) and financial distress costs Ans: D
Choose two key factors of determining the present value of financial distress costs.
A. Information asymmetry B. Magnitude of the costs if the firm is in distress C. Probability of financial distress D. Variability of interest rates Ans: B and C
Holding all other things equal, as the relative amount of debt in the capital structure of a firm increases, the cost of equity capital will decrease.
False
The optimal capital structure is determined by several factors including all of the following except:
A. Potential bankruptcy risk B. Agency costs C. Corporate capital gains D. Business risk Ans: C
A general rule for managers to follow is to set the firm’s capital structure such that:
A. the firm's div payout is maximised B. the firm's value is maximised C. the firm's value is minimised D. the firm's bondholders are made well off Ans: B
Which of the following is NOT the direct cost of financial distress?
A. Payment to creditors B. Audit fees C. Legal fees D. Loss of receivables Ans: D
