Quiz Ch 16 – T/F Debt Financing and Risk Components
Fundamentals of Corporate Finance
Brealey, Myers, and Marcus
10th Edition
True or false: Debt financing leaves the operating risk unaffected but introduces financial risk.
True or false: Debt financing leaves the operating risk unaffected but introduces financial risk.
True or false: When debt levels are moderate, the likelihood of financial distress is negligible, allowing the tax benefits of debt to prevail.
True or false: Once you realize that debt increases financial risk and prompts shareholders to seek higher returns, it becomes clear that debt is not a less expensive option than equity.
True or false: There is a point in the debt-equity ratio where the financial distress costs are predicted to outweigh the advantages of the extra interest tax shield for a firm.
True or false: Financial distress costs arise from bankruptcy or distorted business decisions made prior to bankruptcy.
True or false: Financial leverage characterizes how debt financing magnifies the influence of operating income changes on stockholders’ returns.
True or false: The risk to shareholders known as financial risk is a consequence of utilizing debt financing.
True or false: Financial slack denotes having readily available cash or the ability to secure debt financing.
True or false: Debt financing does NOT alter the business risk or financial risk of the firm in any way.
True or false: The utilization of debt financing has NO impact on the operating risk or business risk of the firm.