Ch. 9 - Capital Structure

Question 1

Capital Structure

Answer 1

The proportion of debt and equity (and their various components) that make up the capital funding of the firm

Question 2

Leverage

Answer 2

Using debt financing to run business

Question 3

Unlevered Firm

Answer 3

A firm with no debt (100% equity). WACC = Cost of Equity Capital

Question 4

Modigliani and Miller Propositions

Answer 4

1. The value of a firm is independent of its financial leverage
2. With greater leverage, the greater the return to equity while WACC stays constant

Question 5

Bankruptcy Costs

Answer 5

Costs happening due to the risk a company may go bankrupt. There are both direct and indirect costs to bankruptcy.

Question 6

Direct Costs to Bankruptcy

Answer 6

Costs that must be paid due to going bankrupt. Example: lawyers

Question 7

Indirect Costs to Bankruptcy

Answer 7

Costs that must be paid as a result of going bankrupt. Examples include: effects on suppliers and customers