Financial Leverage and Capital Structure Policy Multiple Choice Questions

Financial Leverage and Capital Structure Policy Multiple Choice Questions 1. Homemade leverage is: A. the incurrence of debt by a corporation in order to pay dividends to shareholders. B. the exclusive use of debt to fund a corporate expansion project. C. the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage. D. best defined as an increase in a firm's debt-equity ratio. E. the term used to describe the capital structure of a levered firm. 2. Which one of the following states that the value of a firm is unrelated to the firm's capital structure? A. Capital Asset Pricing Model B. M&M Proposition I C. M&M Proposition II D. Law of One Price E. Efficient Markets Hypothesis 3. Which one of the following states that a firm's cost of equity capital is directly and proportionally related to the firm's capital structure? A. Capital Asset Pricing Model B. M&M Proposition I C. M&M Proposition II D. Law of One Price E. Efficient Markets Hypothesis 4. Which one of the following is the equity risk that is most related to the daily operations of a firm? A. market risk B. systematic risk C. extrinsic risk D. business risk E. financial risk Chapter 16 - Financial Leverage and Capital Structure Policy 16-2 5. Which one of the following is the equity risk related to a firm's capital structure policy? A. market B. systematic C. extrinsic D. business E. financial 6. Butter & Jelly reduced its taxes last year by $350 by increasing its interest expense by $1,000. Which of the following terms is used to describe this tax savings? A. interest tax shield B. interest credit C. financing shield D. current tax yield E. tax-loss interest 7. The unlevered cost of capital refers to the cost of capital for a(n): A. private entity. B. all-equity firm. C. governmental entity. D. private individual. E. corporate shareholder. 8. The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as _____ costs. A. flotation B. issue C. direct bankruptcy D. indirect bankruptcy E. unlevered Chapter 16 - Financial Leverage and Capital Structure Policy 16-3 9. The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs. A. flotation B. direct bankruptcy C. indirect bankruptcy D. financial solvency E. capital structure 10. By definition, which of the following costs are included in the term "financial distress costs"? I. direct bankruptcy costs II. indirect bankruptcy costs III. direct costs related to being financially distressed, but not bankrupt IV. indirect costs related to being financially distressed, but not bankrupt A. I only B. III only C. I and II only D. III and IV only E. I, II, III, and IV 11. The proposition that a firm borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs is called: A. the static theory of capital structure. B. M&M Proposition I. C. M&M Proposition II. D. the capital asset pricing model. E. the open markets theorem. 12. Which