Chapter 14 Capital Structure Basic Concepts

In: Business and Management

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Words 6403
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Chapter 14

1. The Modigliani-Miller Proposition I without taxes states:
*A. A firm cannot change the total value of its outstanding securities by changing its capital structure proportions.
B. When new projects are added to the firm the firm value is the sum of the old value plus the new.
C. Managers can make correct corporate decisions that will satisfy all shareholders if they select projects that maximize value.
D. The determination of value must consider the timing and risk of the cash flows.
E. None of the above.

Difficulty level: Medium
Topic: Mm Proposition I

2. Financial leverage impacts the performance of the firm by:
A. increasing the volatility of the firm's EBIT.
B. decreasing the volatility of the firm's EBIT.
C. decreasing the volatility of the firm's net income.
*D. increasing the volatility of the firm's net income
E. None of the above.

Difficulty level: Medium
Topic: Financial Leverage

Difficulty level: Medium
Topic: Mm Proposition I

3. The change in firm value in the presence of corporate taxes only is:
A. positive as equity holders face a lower effective tax rate.
*B. negative as equity holders gain the tax shield on the debt interest.
C. negative because of the increased risk of default and fewer shares outstanding.
D. negative because of a reduction of equity outstanding.
E. None of the above.

Difficulty level: Medium
Topic: Firm Variation with Corporate Taxes

4. Bryan invested in Bryco, Inc. stock when the firm was financed solely with equity. The firm is now utilizing debt in its capital structure. To unlever his position, Bryan needs to:
A. borrow some money and purchase additional shares of Bryco stock.
*B. sell some shares of Bryco stock and loan it out such that he creates a personal debt- equity ratio equal to that of the firm.
C. sell some shares of Bryco…...

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