Chapter 17

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Indirect costs of financial distress:

Although the use of debt provides tax benefits to the firm, debt also puts pressure on the firms to:

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TL Company

The Trunk Line Company

The possibility of bankruptcy has a negative effect on the value of the firm because:

Given realistic estimates of the probability and cost of bankruptcy, the future costs of a possible bankruptcy are borne by:

While difficult to determine exactly, White, Altman, and Weiss estimated the distress costs to be about _______ of the firm's market value.

The value of a firm in financial distress diminishes if the firm:

Conflicts of interest between stockholders and bondholders are known as:

One of the indirect costs of bankruptcy is the incentive for managers to take large risks. When following this strategy, the firm will:

The optimal capital structure has been achieved when the:

When shareholders pursue selfish strategies such as taking large risks or paying excessive dividends, these will result in:

Indirect costs of bankruptcy are born principally by:

One of the indirect bankruptcy costs is the incentive toward underinvestment. Following this strategy may result in:

"Junk bond" is a term used to describe bonds:

The main difference between positive and negative covenants is (are):

Covenants restricting the use of leasing and additional borrowings, primarily protect:

If the firm issues debt but writes protective and restrictive covenants into the loan contract, then the debt may be issued at a(an) _____ interest rate compared with otherwise similar debt.

When graphing firm value against debt levels, the debt level that maximizes the value of the firm is the level where:

The basic lesson of MM theory is that the value of a firm is dependent upon the:

The value of the firm is the sum of all claims against it. These marketed and non-marketed claims:

When small companies issue large stock offerings, we can expect owner-managers to:

When firms issue more debt, the tax shield on debt _____, the agency costs on debt (i.e., costs of financial distress) _____, and the agency costs on equity _____

The free cash flow hypothesis states:

Issuing debt instead of new equity in a closely held firm more likely:

The pecking order states how financing should be raised. In order to avoid asymmetric information problems and misinterpretation of whether management is sending a signal on security overvaluation the firm's first rule is to:

Which of the following is true when a firm has level coupon debt outstanding and growth opportunities?

The introduction of personal taxes may reveal a disadvantage to the use of debt if the:

In the Miller Model, when the quantity (1-Tc)(1-Ts) = (1-Tb), then:

What three factors are important to consider in determining a target debt to equity ratio?

The Zercon Company

Suppose a Miller equilibrium exists with a corporate tax rate of 30% and a personal tax rate on income from bonds of 35%. What is the personal tax rate on income from stocks?

Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 50% Personal tax rate on income from stocks: 10%

Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 10% Personal tax rate on income from stocks: 50%

Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 30% Personal tax rate on income from stocks: 30%

Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 0%

The Lanoi Company

Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 30% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 0%

The optimal capital structure:

The MM theory with taxes implies that firms should issue maximum debt. In practice, this is not true because:

Your firm has a debt-equity ratio of.60. Your cost of equity is 11% and your after-tax cost of debt is 7%. What will your cost of equity be if the target capital structure becomes a 50/50 mix of debt and equity?

The Aggie Company

The optimal capital structure will tend to include more debt for firms with:

The optimal capital structure of a firm _____ the marketed claims and _____ the nonmarketed claims against the cash flows of the firm.

Studies have found that firms with high proportions of intangible assets are likely to use _______ debt compared with firms with low proportions of intangible assets.

Rotomax Inc.

The Do-All-Right Marketing Research firm

Given a situation where the corporate tax rate is 34%, and the personal tax rate on dividends is 28%, what must the personal tax rate on interest be to achieve the Miller equilibrium?

Description

Test your knowledge on the indirect costs of financial distress, including the pressure on firms due to debt and the negative impact of bankruptcy on firm value.

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