Quiz Ch 13 – Relationships in Capital Structure and Financial Outcomes
Fundamentals of Financial Management, Concise
Brigham and Houston
09th Edition
Which of the following statements is accurate?
Which of the following statements is accurate?
True or false: Keeping other factors unchanged, companies utilizing easily sellable assets (e.g., trucks) tend to employ more debt than those with assets that are more challenging to sell (e.g., research and development-focused firms).
True or false: Firms A and B could possess matching financial and operating leverage, while Firm A exhibits greater EPS variability due to higher business risk compared to Firm B.
True or false: Modigliani and Miller (MM) assumed uniform information between managers and outside stockholders, but this “symmetric information” concept is questionable. The introduction of “asymmetric information” led to the “signaling” theory of capital structure. It posits that firms avoid issuing new stock due to investors interpreting it as managers’ concern. Various actions send different signals, shaping capital structure based on managers’ perception of financing impact on investor views and firm value.
True or false: Some, like Ben Bernanke, argue that corporate debt directs managers’ attention to cash flow and curbs excessive spending on luxuries. This aspect contributed to the rise of LBOs and private equity firms.
True or false: As discussed in the text, it is possible and advisable to break down a firm’s financial risk into distinct market and diversifiable risk elements.
True or false: Firms with matching expected EPS and standard deviation of EPS possess equivalent business risk.
True or false: Modigliani and Miller’s first article deemed capital structure “irrelevant” for firm value, excluding taxes. They later revised it, incorporating taxes, and found that a firm’s value could be maximized with nearly 100% debt.
True or false: The Miller model extends the Modigliani and Miller (MM) corporate tax model by including personal taxes.
True or false: “Financial flexibility” means having access to funds for operations, especially in tough times. With everything else equal, a lower debt ratio enhances financial flexibility.