Exam

Name___________________________________

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
1) It appears that, capital structures vary quite a bit across differing industry groups. 1) _______

2) The optimal capital structure is the mixture of debt and equity which maximizes the 2) _______
value of the firm and minimizes the firm's weighted average cost of capital.

3) When a firm is operating at its target capital structure point, the firm's WACC is at its 3) _______
minimum point.

4) When a firm is operating at its target capital structure point, the debt-equity ratio is 4) _______
equal to 1.

5) When a firm is operating at its target capital structure point, shareholder value is 5) _______
maximized.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
6) The explicit costs associated with corporate default, such as legal expenses, are the 6) _______
________ of the firm.
A) Direct bankruptcy costs.
B) Default risk premium.
C) Flotation costs.
D) Indirect bankruptcy costs.
E) Default beta coefficients.

7) The implicit costs associated with corporate default, such as lost sales, are the 7) _______
________ of the firm.
A) Default beta coefficients.
B) Default risk premium.
C) Flotation costs.
D) Indirect bankruptcy costs.
E) Direct bankruptcy costs.

8) The optimal capital structure of a firm maximizes the value of the firm while: 8) _______
A) Minimizing the financial distress costs.
B) Equating the level of debt to the level of equity.
C) Minimizing the debt-equity ratio.
D) Maximizing the interest tax shield.
E) Minimizing the firm's cost of capital.

9) The ideal capital structure: 9) _______

A) Is that combination of debt and equity which results in a debt-equity ratio of 1.0.
B) Produces the lowest weighted average cost of capital.
C) Is that combination of debt and equity which yields the highest level of sales
growth.
D) Is generally unobtainable as it exists only in a firm financed solely with debt.
E) Is that of an unlevered firm.
10) The legal proceeding for liquidating or reorganizing a firm operating in default is called 10) ______
A) Takeover.
B) Bankruptcy.
C) Merger.
D) Tender offer.
E) Proxy fight.
 1) TRUE
2) TRUE
3) TRUE
4) FALSE
5) TRUE
6) A
7) D
8) E
9) B
10) B