10 Questions
According to trade-off theory, beyond the level of _________, the marginal benefit of tax shield is outweighed by the marginal increase in the cost of equity.
Optimal level of debt
Which of the following is an accurate measure of gearing ratio?
Debt/Capital
According to Modigliani and Miller’s Proposition II (with tax), the optimal capital structure is:
100% debt
The cost of having to sell assets at below market value is an example of:
Indirect bankruptcy costs
The fundamental principle behind tax exhaustion is:
Insufficient Profits
A high gearing ratio implies that a company has:
High Debt
According to Pecking Order Theory, the order of preference of capital would be:
Retained earnings > Debt > Equity
The explicit costs, such as the legal expenses, associated with corporate default are classified as _____ costs. midterm
direct bankruptcy
In general, the capital structures used by U.S. firms:
vary significantly across industries
One of the indirect costs of bankruptcy is the incentive for managers to take large risks. When following this strategy:
stockholders expropriate value from bondholders by selecting high-risk projects.
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