Quiz Ch 13 – Objectives of the Firm’s Target Capital Structure
Fundamentals of Financial Management, Concise
Brigham and Houston
09th Edition
What is the purpose of the firm’s target capital structure?
What is the purpose of the firm’s target capital structure?
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: Varied borrowers possess distinct bankruptcy risks; in the event of borrower bankruptcy, lenders are unlikely to recover the complete loaned amount. Consequently, lenders demand higher rates from borrowers deemed more prone to bankruptcy.
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: Capital structure decisions are governed by the trade-off theory, which asserts that these decisions entail balancing the advantages and drawbacks of debt financing.
True or false: The discussed text states that a firm’s capital structure has no influence on its free cash flows since FCF solely encompasses operating cash flows, which are accessible for servicing debt, distributing dividends to shareholders, and other applications.
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: If a firm employs debt financing, a 10% reduction in earnings before interest and taxes (EBIT) leads to a greater-than-10% decline in earnings per share (EPS). Moreover, a higher debt ratio magnifies this disparity.