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1. The mix of debt and equity that a firm uses to finance its operations is known as:
2. If a firm changes their capital structure by immediately selling additional claims of one
type of capital and using the proceeds to retire another kind of claims, they are using which type
of capital structure change?
3. If a firm changes their capital structure by waiting until the firm requires additional
capital to cover capital budgeting needs and then selling more of the type of claims they wish to
increase, they are using which type of capital structure change?
4. Which of the following is NOT a factor for determining whether to use the active or
passive approach to capital structure changes?
5. Another name for debt in the capital structure is:
6. Which of the following is NOT a feature of the "perfect world" in M&M's theorem for
optimal capital structure?
7. Which of the following is a feature of the "perfect world" in M&M's theorem for optimal
capital structure?
8. In M&M's perfect world, their theorem's two main propositions are referred to as which of
the following?
9. Which of these is the assumption that decisions about which projects to fund are
separate from the decisions about how to fund them?
10. Which of the following is a true statement?
11. Which of the following makes this a true statement? In this slightly more realistic world
with corporate taxes, managers can:
12. What causes the change in optimal strategy when taxes are added back to the M&M
theorem?
13. Which of the following is a true statement regarding Proposition I?
14. How can an investor leverage itself more than the firm?
15. Which of the following is one of the most extreme examples of firm re-leveraging that
occurs when someone uses a firm's debt capacity to buy out the majority of the firm's equity
holders?
16. The level of EBIT at which EPS will be equal for two different capital structures is known
as:
17. Which of the following allows for two types of bankruptcy for which most businesses can
file?
18. Which type of bankruptcy involves a business liquidating their assets?
19. Which type of bankruptcy involves an attempt to allow the firm to reorganize the business
under court supervision?
20. Which of these is the rule under which claimants are paid in a Chapter 7 bankruptcy?
21. Which of the following is the condition in which a firm is near bankruptcy?
22. A situation that arises when a firm's equity is close to worthless, and equity holders will
prefer to invest in overly risky projects with a small chance of success rather than simply paying
debt holders their regularly scheduled payments is known as a(n):
23. Which of these is a situation that arises when a firm's equity is close to worthless, and
equity holders will prefer to not invest in safe projects?
24. Which of the following is a true statement?
25. Suppose that a company's equity is currently selling for $22 per share and that there are
4 million shares outstanding and 30 thousand bonds outstanding, which are selling at 101
percent of par ($1,000). If the firm was considering an active change to their capital structure so
that the firm would have a D/E of 0.9, which type of security (stocks or bonds) would they need
to sell to accomplish this, and how much would they have to sell?
26. Suppose that a company's equity is currently selling for $19 per share and that there are
3 million shares outstanding and 10 thousand bonds outstanding, which are selling at 100
percent of par ($1,000). If the firm was considering an active change to their capital structure so
that the firm would have a D/E of 0.5, which type of security (stocks or bonds) would they need
to sell to accomplish this, and how much would they have to sell?
27. Suppose that a company's equity is currently selling for $45 per share and that there are
1 million shares outstanding. If the firm also has 7 thousand bonds outstanding, which are selling
at 97 percent of par ($1,000), what are the firm's current capital structure weights for equity and
debt respectively?
28. Suppose that a company's equity is currently selling for $30 per share and that there are
5 million shares outstanding. If the firm also has 20 thousand bonds outstanding, which are
selling at 98 percent of par ($1,000), what are the firm's current capital structure weights for
equity and debt respectively?
29. Suppose that a company's equity is currently selling for $20 per share and that there are
2 million shares outstanding. If the firm also has 8 thousand bonds outstanding, which are selling
at 99 percent of par ($1,000), what are the firm's current capital structure weights for equity and
debt respectively?
30. Suppose that a company's equity is currently selling for $55 per share and that there are
1 million shares outstanding. If the firm also has 50 thousand bonds outstanding, which are
selling at 95 percent of par ($1,000), what are the firm's current capital structure weights for
equity and debt respectively?
