Principles of Finance, 6e
Besley/Brigham
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Time Estimate-a – 5 min.
TOPICS:
MM, Taxes, and Capital Structure
79. According to MM, in a world without taxes, the optimal capital structure for a firm should approach 100 percent debt
financing.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-08 – Risk and Return
Time Estimate-a – 5 min.
TOPICS:
MM and Optimal Capital Structure
80. You are the president of a small, publicly-traded corporation. Since you believe that your firm’s stock price is
temporarily depressed, all additional capital funds required during the current year will be raised using debt. Thus, the
appropriate marginal cost of capital for the current year is the after-tax cost of debt.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-08 – Risk and Return
Time Estimate-a – 5 min.
TOPICS:
Cost of Capital
81. The presence of asymmetric information affects capital structure because it can affect managers’ financing decisions.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Information Asymmetry
82. One of the implications of signaling theory for capital structure decisions is that firms should normally seek to
maintain a reserve borrowing capacity.
Principles of Finance, 6e
Besley/Brigham
Chapter 14
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a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Reserve Borrowing Capital
83. The optimal dividend policy for a firm strikes a balance between payment of current dividends and retention of
earnings for future growth, and results in the maximization of stock price.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Optimal Dividend Policy
84. The dividend irrelevance theory, proposed by Miller and Modigliani, says that as long as a firm pays a dividend, how
much it pays does not affect either its cost of capital or its stock price.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Dividend Irrelevance
85. Modigliani and Miller’s dividend irrelevance theory says that dividend policy does not affect a firm’s value but can
affect its cost of capital.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
Principles of Finance, 6e
Besley/Brigham
Chapter 14
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Page 38
89. 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:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Business Risk
90. A consistent supply of capital is essential for the long-run success of a firm. Although a firm may have access to
capital under all types of economic conditions, the concept of financial flexibility implies that the firm can obtain capital
on acceptable, competitive terms.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Financial Flexibility
91. Debt has benefits for firms because interest is tax deductible. As long as a firm has positive earnings it can receive the
full benefit of the tax deductibility of debt interest expense.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Tax Position
92. The benefit to the firm of the tax deductibility of interest can be lowered if the firm’s marginal tax rate is reduced by
accumulated depreciation or tax-loss carry-forwards.
a.
True
b.
False
Principles of Finance, 6e
Besley/Brigham
Chapter 14
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ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Tax Position
93. An all equity firm has some risk inherent in its operations. When the firm decides to finance some of its operations
with debt, it exposes itself to financial risk and it increases its business risk.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Financial and Business Risk
94. Once the target capital structure for a firm is decided, managerial decisions can result in the actual capital structure
differing from the target structure, but operating conditions will have a negligible effect on actual capital structure.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Target Capital Structure
95. The fact that some managers are more aggressive in their use of debt financing in attempting to boost profits does not
influence the optimal or value-maximizing capital structure.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
Principles of Finance, 6e
Besley/Brigham
Chapter 14
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99. The weighted average cost of capital (WACC) declines as more of the lowest cost component is added. What limits a
firm from using nearly all debt is that as the debt-to-assets ratio rises, the absolute interest expense gets very large. The
large interest expense reduces income and results in a debt-to-assets ratio limit even though the WACC continues to
decline.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Limits to Using Debt (WACC)
100. As the debt-to-assets ratio rises, the WACC is reduced because the after-tax cost of debt is usually lower than the
cost of equity. What limits the substitution of debt for equity in the capital structure is that as the debt-to-assets ratio rises,
the costs of both components eventually increase.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Limits to Using Debt (WACC)
101. If Miller and Modigliani had considered the cost of bankruptcy, it is unlikely that they would have concluded that
100 percent debt financing is optimal for the firm.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
MM and Bankruptcy Costs
102. If we consider only agency costs associated with the issuance of debt, then this implies that the firm should move
toward 100 percent debt financing.
Principles of Finance, 6e
Besley/Brigham
Chapter 14
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a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Agency Costs
103. One implication of information asymmetry between investors and firm managers is that if a firm raises new capital
by issuing debt rather than by selling stock, it signals that the firm has very good prospects.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Information Asymmetry
104. The announcement of a stock offering by a mature firm that seems to have financing alternatives is taken as a signal
that the firm’s prospects are very good.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Equity Signal
105. If the announcement of a stock sale does in fact trigger a decline in stock price, this reinforces the effects of flotation
costs incurred with new equity issues. Further, this implies a larger break in the MCC schedule.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
Principles of Finance, 6e
Besley/Brigham
Chapter 14
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109. How a firm splits its income between retained earnings and dividends does not affect its rate of growth, which is
determined by the firm’s basic earning power.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Earnings, Dividends, and Growth
110. If the shape of the curve depicting a firm’s WACC versus its debt-to–assets ratio is more like a sharp “V“, as opposed
to a shallow “U“, it will be easier for the firm to maintain a steady dividend in the face of varying investment
opportunities from year to year.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
WACC and Dividend Policy
111. If the information content, or signaling, hypothesis is correct, then changes in dividend policy can be important with
respect to firm value and capital costs.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Signaling and Hypothesis
112. A firm’s capital structure and dividend policy can affect the firm’s cash position but has no impact on the market
value of the firm’s stock.
a.
True
b.
False
Principles of Finance, 6e
Besley/Brigham
Chapter 14
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ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Capital Structure and Dividend Policy
113. Changing the capital structure of the firm will affect the riskiness inherent in the firm’s common stock, which will
affect the return demanded by stockholders and the stock’s
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Capital Structure and WACC
114. Business risk is the single most important determinant of a firm’s capital structure.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Business Risk Determinants
115. An increase in the financial leverage of a firm will generally increase the variability in EPS for the firm.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
Principles of Finance, 6e
Besley/Brigham
Chapter 14
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ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Capital Risk and Structure
120. Business risk is the single most important determinant of a firm’s capital structure.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-07 – Finance Function
Time Estimate-a – 5 min.
TOPICS:
Business Risk Determinants