Quiz Ch 18 – T/F Incentive for High-Risk Debt Issuance in Near-Bankruptcy Firms
Principles of Corporate Finance
Brealey, Myers, and Allen
13th Edition
True or false: Firms on the brink of bankruptcy are inclined to issue debt with higher risk.
True or false: Firms on the brink of bankruptcy are inclined to issue debt with higher risk.
True or false: In the presence of financial distress costs, the value of a levered firm is determined by adding the unlevered firm value, the present value of tax shields, and subtracting the present value of financial distress costs.
True or false: For a levered firm with permanent debt level D, the value is the sum of the unlevered firm value and (TC)(D), assuming no financial distress costs.
True or false: In MM’s Proposition I adjusted for corporate taxes, the value of the levered firm is the sum of the value of the unlevered firm and the present value of the tax shield.
True or false: Financial distress invariably leads to bankruptcy.
True or false: According to the pecking order theory, firms tend to choose internal financing over external financing.
True or false: The privilege to default is advantageous for shareholders.
True or false: In corporate financing, the prevailing tax code favors the preference for equity over debt.
True or false: The interaction of corporate and personal taxes, represented by (1 − Tp) and (1 − TpE)(1 − Tc), respectively, reduces the significance of the debt policy decision when they are equal.
True or false: Profitable firms are anticipated to exhibit higher average debt ratios in line with the trade-off theory.