Group Presentation 6: Capital Structure 3 Flashcards
According to the tradeoff theory, the total value of a levered firm equals the value of the firm w/o leverage plus the present value of _, less the present value of _
A. Interest payments, financial distress costs
B. Financial distress costs, interest payments
C. Financial distress costs, interest tax shield
D. Interest tax shield, financial distress costs
Ans: D
The tradeoff theory of capital structure suggests that:
A. Firms add leverage whenever interest rates are low
B. Firms w/ higher risk should use less debt
C. Firms should use debt to overcome high par values of stock
D. Firms should use 50% debt and 50% equity
Ans: B
The pecking order theory indicates that firms prefer_ financing over_ financing.
A. Debt, retained earnings B. Equity, debt C. Internal, external D. External, internal Ans: C
When there is asymmetric information, _ have better information than_.
A. Managers, investors
B. Investors, managers
Ans: A
Which is the cheapest source of financing?
A. Retained earnings B. Debt C. Equity D. Convertible securities Ans: A
When firms’ capital structure decisions are consistent w/ the Pecking Order Theory, the reason behind their decision is always caused by information asymmetry.
False
The capital structure decision varies in different sectors and countries.
True
Any financial benefit derived from the interst tax shield accrues to the:
A. Shareholders B. Bondholders C. Managers D. All of the above Ans: A
In reality, when external financing is required but the agency costs or financial distress costs of debt are too great, firms may prefer to issue equity instead.
True
The negative relationship between profitability and leverage is in line w/ which theory?
A. Pecking Order Theory B. Tradeoff Theory C. Market Timing Theory D. None of the above Ans: A
