Ch 15 Capital Structure Decisions PDF

Preview

Summary

Download Ch 15 Capital Structure Decisions PDF

Description

Ch 15 Capital Structure Decisions 1. Different borrowers have different risks of bankruptcy, and bankruptcy is costly to lenders. Therefore, lenders charge higher rates to borrowers judged to be more at risk of going bankrupt. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Difficulty: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA TOPICS: Bankruptcy costs KEYWORDS: Bloom’s: Knowledge DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTION ID: JFND-GO4G-EO4D-1QNR QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMMB-CT1S-KQJA-8R3S-NCJWCASU-NP3A-8YSS-CA3I-GOSU-G3DD-CCSU-CCTT-8R3D-KCUR-E7JI-YT4D-JFNN4OTI-GO4W-NQNBEE 2. 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 ANSWER: False POINTS: 1 DIFFICULTY: Difficulty: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA TOPICS: Business risk KEYWORDS: Bloom’s: Knowledge DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTION ID: JFND-GO4G-EO4D-1QND QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMJ1-CE5U-O3MR-GW3U-RA5BCASS-KQJZ-8YSS-RPTW-GOSU-1CTA-CESU-1A3W-GEHD-1CBO-E7JI-YT4D-JFNN4OTI-GO4W-NQNBEE Page 1

Ch 15 Capital Structure Decisions 3. Financial risk refers to the extra risk stockholders bear as a result of using debt as compared with the risk they would bear if no debt were used. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Difficulty: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA TOPICS: Financial risk KEYWORDS: Bloom’s: Knowledge DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTION ID: JFND-GO4G-EO4D-1QBU QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMJU-CA4D-RATW-GCAS-CAJOCWSU-NCMG-CRSU-GCJO-GOSS-NCTI-8YSU-EAJW-G3TU-CCMB-E7JI-YT4D-JFNN4OTI-GO4W-NQNBEE 4. As the text indicates, a firm's financial risk has identifiable market risk and diversifiable risk components. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Difficulty: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA TOPICS: Financial risk KEYWORDS: Bloom’s: Knowledge DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTION ID: JFND-GO4G-EO4D-1QB1 QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMMB-8BUD-1P5D-CTTD-Q3B3-CASSEPDG-CESU-E3MN-GOSU-Y3DN-COSU-CQMF-C3UG-N3MG-E7JI-YT4D-JFNN-4OTIGO4W-NQNBEE Page 2

Ch 15 Capital Structure Decisions 5. A firm's capital structure does not affect its calculated free cash flows, because FCF reflects only operating cash flows. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Difficulty: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA TOPICS: Financial risk KEYWORDS: Bloom’s: Knowledge DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTION ID: JFND-GO4G-EO4D-1QBT QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMMF-8BUD-GPTA-GB1U-NQBACOSS-GA3W-8YSU-YCBW-GOSU-Q3DR-8YSS-R3B1-8FUG-ECDD-E7JI-YT4D-JFNN4OTI-GO4W-NQNBEE 6. Whenever a firm borrows money, it is using financial leverage. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Difficulty: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA TOPICS: Financial leverage KEYWORDS: Bloom’s: Knowledge DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTION ID: JFND-GO4G-EO4D-1QBO QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMMF-CJTD-YCJA-CW5S-RPTOGCSS-RPB3-8RSU-OQBI-GOSS-RATT-CRSU-QCJO-CFOS-CPBW-E7JI-YT4D-JFNN4OTI-GO4W-NQNBEE Page 3

Ch 15 Capital Structure Decisions 7. 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 ANSWER: False POINTS: 1 DIFFICULTY: Difficulty: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA TOPICS: Use of financial leverage KEYWORDS: Bloom’s: Knowledge DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTION ID: JFND-GO4G-EO4D-1QBZ QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMJ3-G71G-EPTI-GJ1D-O3DR-GOSSCPTA-8RSS-KCTI-GOSS-NA3T-GCSU-CAJI-COHD-CQJT-E7JI-YT4D-JFNN-4OTIGO4W-NQNBEE 8. Provided a firm does not use an extreme amount of debt, financial leverage typically affects both EPS and EBIT, while operating leverage only affects EBIT. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Difficulty: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA TOPICS: Operating and financial leverage KEYWORDS: Bloom’s: Knowledge DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTION ID: JFND-GO4G-EO4D-1QBS QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMMF-8YAD-YCTZ-GW5U-OAMBGYSU-KPTA-8RSU-GPBT-GOSS-GPJ3-GYSU-GQJW-GE3G-CCMR-E7JI-YT4D-JFNN4OTI-GO4W-NQNBEE Page 4

Ch 15 Capital Structure Decisions 9. If a firm utilizes debt financing, an X% decline in earnings before interest and taxes (EBIT) will result in a decline in earnings per share that is larger than X. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Difficulty: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA TOPICS: Use of debt in financing KEYWORDS: Bloom’s: Comprehension DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTION ID: JFND-GO4G-EO4D-1QBW QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMJU-CO4D-E3JA-CW3U-QA5R-8YSUNCJO-8RSS-RQJ3-GOSU-OCMF-GASU-Q3UB-CI1U-OQJ3-E7JI-YT4D-JFNN-4OTIGO4W-NQNBEE 10. Firm A has a higher degree of business risk than Firm B. Firm A can offset this by using less financial leverage. Therefore, the variability of both firms' expected EBITs could actually be identical. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Difficulty: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA TOPICS: Financial leverage KEYWORDS: Bloom’s: Comprehension DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTION ID: JFND-GO4G-EO4D-1QKN QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMMB-8FUD-NPJS-GIUD-Q3JU-COSSGQDD-CRSU-RAJU-GOSU-QA3T-GCSU-1AJT-CP1G-CQMB-E7JI-YT4D-JFNN-4OTIPage 5

Ch 15 Capital Structure Decisions GO4W-NQNBEE 11. Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Difficulty: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA TOPICS: Business risk KEYWORDS: Bloom’s: Comprehension DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTION ID: JFND-GO4G-EO4D-1QKB QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMMD-CITG-KPDG-CW3U-RQJ3GYSU-QAJS-CESS-KCDF-GOSU-QQBI-CASU-EPDR-8BUG-NQJU-E7JI-YT4D-JFNN4OTI-GO4W-NQNBEE 12. It is possible that two firms could have identical financial and operating leverage, yet have different degrees of risk as measured by the variability of EPS. a. True b. False ANSWER: True If one firm's sales and earnings were more volatile than those of the other, it could have RATIONALE: greater EPS variability in spite of identical financial and operating leverage.

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: LOCAL STANDARDS: TOPICS: KEYWORDS: DATE CREATED: DATE MODIFIED: QUESTION ID: Page 6

1 Difficulty: Moderate True / False False FMTP.EHRH.17.15.02 - LO: 15-2 United States - BUSPROG: Reflective Thinking United States - ak - DISC: Capital structure United States - OH - Default City - TBA Operating and financial leverage Bloom’s: Comprehension 8/26/2015 10:46 AM 8/26/2015 10:46 AM JFND-GO4G-EO4D-1QJ3

Ch 15 Capital Structure Decisions QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMJS-CCHD-RCMF-GFTG-E3BI-8YSSNPDF-CESU-YCUG-GOSS-NPMF-8RSS-RPB3-GEHG-RQDD-E7JI-YT4D-JFNN-4OTIGO4W-NQNBEE 13. Which of these items will not generally be affected by an increase in the debt ratio? a. Total risk. b. Financial risk. c. Market risk. d. The firm's beta. e. Business risk. ANSWER: e POINTS: 1 DIFFICULTY: Difficulty: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Analytic STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA TOPICS: Business risk KEYWORDS: Bloom’s: Comprehension OTHER: TYPE: Multiple Choice: Conceptual DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTION ID: JFND-GO4G-EO4D-1QKG QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMMR-GHAD-EPTO-CWHD-OCUDCOSS-G3B3-8YSU-YATS-GOSU-G3JU-CASU-YQBU-GTTU-KCJI-E7JI-YT4D-JFNN4OTI-GO4W-NQNBEE 14. Which of the following is NOT associated with (or does not contribute to) business risk? Recall that business risk is affected by a firm's operations. a. Sales price variability. b. The extent to which operating costs are fixed. c. The extent to which interest rates on the firm's debt fluctuate. d. Input price variability. e. Demand variability. ANSWER: c POINTS: 1 DIFFICULTY: Difficulty: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 Page 7

Ch 15 Capital Structure Decisions NATIONAL STANDARDS: STATE STANDARDS: LOCAL STANDARDS: TOPICS: KEYWORDS: OTHER: DATE CREATED: DATE MODIFIED: QUESTION ID: QUESTION GLOBAL ID:

United States - BUSPROG: Analytic United States - ak - DISC: Capital structure United States - OH - Default City - TBA Business risk Bloom’s: Comprehension TYPE: Multiple Choice: Conceptual 8/26/2015 10:46 AM 8/26/2015 10:46 AM JFND-GO4G-EO4D-1QKF GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMMG-GJ1S-NC5R-CW3U-YPTWGRSS-E3JS-CESS-GP3T-GOSS-R3UG-GRSU-KAT3-GFUD-KQBU-E7JI-YT4D-JFNN4OTI-GO4W-NQNBEE

15. Which of the following statements is CORRECT? As a firm increases the operating leverage used to produce a given quantity of output, this will a. normally lead to a decrease in its business risk. b. normally lead to a decrease in the standard deviation of its expected EBIT. c. normally lead to a decrease in the variability of its expected EPS. d. normally lead to a reduction in its fixed assets turnover ratio. e. normally lead to an increase in its fixed assets turnover ratio. ANSWER: d More operating leverage generally means a greater use of automation, which means more RATIONALE: fixed assets. If fixed assets increase, but sales do not, then the fixed asset turnover (S/FA) will decline.

POINTS: 1 DIFFICULTY: Difficulty: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Analytic STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA TOPICS: Operating leverage KEYWORDS: Bloom’s: Analysis OTHER: TYPE: Multiple Choice: Conceptual DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTION ID: JFND-GO4G-EO4D-1TKN QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMJO-GJTG-NQBW-GITU-NQBTGHSS-G3J1-CRSS-EPJT-GOSS-KPUG-CCSU-13T3-CW3D-OCB3-E7JI-YT4D-JFNN4OTI-GO4W-NQNBEE 16. If debt financing is used, which of the following is CORRECT? Page 8

Ch 15 Capital Structure Decisions a. The percentage change in net operating income will be equal to a given percentage change in net income. b. The percentage change in net income relative to the percentage change in net operating income will depend on the interest rate charged on debt. c. The percentage change in net income will be greater than the percentage change in net operating income. d. The percentage change in sales will be greater than the percentage change in EBIT, which in turn will be greater than the percentage change in net income. e. The percentage change in net operating income will be greater than a given percentage change in net income. ANSWER: c POINTS: 1 DIFFICULTY: Difficulty: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Analytic STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA TOPICS: Use of financial leverage KEYWORDS: Bloom’s: Analysis OTHER: TYPE: Multiple Choice: Conceptual DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTION ID: JFND-GO4G-EO4D-1TKB QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMJO-CFOS-K3UN-CI1U-QP3S-CASSEPB1-CRSU-O3TA-GOSS-KPTI-CRSU-1ATI-C3TU-GA5G-E7JI-YT4D-JFNN-4OTIGO4W-NQNBEE 17. Which of the following statements is CORRECT, holding other things constant? a. An increase in the personal tax rate is likely to increase the debt ratio of the average corporation. b. If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation. c. An increase in the company's degree of operating leverage is likely to encourage a company to use more debt in its capital structure. d. An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure. e. Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively little debt. ANSWER: d POINTS: 1 DIFFICULTY: Difficulty: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Analytic STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA Page 9

Ch 15 Capital Structure Decisions TOPICS: Leverage and capital structure KEYWORDS: Bloom’s: Analysis OTHER: TYPE: Multiple Choice: Conceptual DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTION ID: JFND-GO4G-EO4D-1TJ3 QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMMD-CO3U-GQMN-CPTU-Y3UBCESS-GQDD-CRSU-GQBW-GOSS-NP3W-CCSS-EP3I-GHAG-GCTI-E7JI-YT4D-JFNN4OTI-GO4W-NQNBEE 18. Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure? a. The costs that would be incurred in the event of bankruptcy increase. b. Management believes that the firm's stock has become overvalued. c. Its degree of operating leverage increases. d. The corporate tax rate increases. e. Its sales become less stable over time. ANSWER: d POINTS: 1 DIFFICULTY: Difficulty: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Analytic STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA TOPICS: Leverage and capital structure KEYWORDS: Bloom’s: Analysis OTHER: TYPE: Multiple Choice: Conceptual DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTION ID: JFND-GO4G-EO4D-1TJA QUESTION GLOBAL ID: GCID-E7BW-1TBP-CEHD-QQBA-GFTD-GP5N-CA51-4CJT-8FO1-43UN-GO4N-4AJ3GPT1-4QBT-GW4G-G3MF-GTDI-GWN8-EPRW-EMMB-GAAG-KCTU-GPUD-CC5RGOSU-K3J3-8RSU-OAJA-GOSS-E3UG-GOSU-O3BW-GCAS-KP33-E7JI-YT4D-JFNN4OTI-GO4W-NQNBEE 19. Blueline Publishers is considering a recapitalization plan. It is currently 100% equity financed but under the plan it would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock. The recapitalization would not change the company's total assets, nor would it affect the firm's basic earning power, which is currently 15%. The CFO believes that this recapitalization would reduce the WACC and increase stock price. Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan? a. The company's earnings per share would decline. b. The company's cost of equity would increase. c. The company's ROA would increase. Page 10

Ch 15 Capital Structure Decisions d. The company's ROE would decline. e. The company's net income would increase. ANSWER: b POINTS: 1 DIFFICULTY: Difficulty: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMTP.EHRH.17.15.02 - LO: 15-2 NATIONAL STANDARDS: United States - BUSPROG: Analytic STATE STANDARDS: United States - ak - DISC: Capital structure LOCAL STANDARDS: United States - OH - Default City - TBA TOPICS: Leverage and capital structure KEYWORDS: Bloom’s: Analysis OTHER: TYPE: Multiple Choice: Conceptual DATE CREATED: 8/26/2015 10:46 AM DATE MODIFIED: 8/26/2015 10:46 AM QUESTIO...