Capital Structure Quiz

Capital Structure

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Which of the following is not a reason why target capital structure and actual capital structure tend to differ ?

2 / 44

Which of the following is least likely an appropriate method for an analyst to estimate a firm’s target capital structure ?

3 / 44

A company is most likely to be financed only by equity during its :

4 / 44

According to Modigliani and Miller’s Proposition II without taxes :

5 / 44

Which of the following is an example of agency costs? In each case, management is advocating a substantial acquisition and management compensation is heavily composed of stock options .

6 / 44

Removing the assumption of no taxes, but keeping all of Modigliani and Miller's other assumptions, which of the following would be the optimal capital structure for maximizing the value of a firm ?

7 / 44

Nailah Mablevi is an equity analyst who covers the entertainment industry for Kwame Capital Partners, a major global asset manager. Kwame owns a significant position, with a large unrealized capital gain, in Mosi Broadcast Group (MBG). On a recent conference call, MBG’s management stated that they plan to increase the proportion of debt in the company’s capital structure. Mablevi is concerned that any changes in MBG’s capital structure will negatively affect the value of Kwame’s investment.

To evaluate the potential impact of such a capital structure change on Kwame’s investment, she gathers the information about MBG given in below :

Current Selected Financial Information on MBG
8.00 % Yield to maturity on debt
USD 100 million Market value of debt
10 million Number of shares of common stock
USD 30 Market price per share of common stock
10.30 % Cost of capital if all equity-financed
35 % Marginal tax rate

Holding operating earnings constant, an increase in the marginal tax rate to 40 % would :

8 / 44

Which of the following statements regarding Modigliani and Miller’s Proposition I is most accurate ?

9 / 44

According to the static trade off theory :

10 / 44

Identify two market conditions that can be characterized as favorable for companies wishing to add debt to their capital structures.

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If investors have homogeneous expectations, the market is efficient, and there are no taxes, no transaction costs, and no bankruptcy costs, Modigliani and Miller’s Proposition I states that :

12 / 44

Fran McClure of Alba Advisers is estimating the cost of capital of Frontier Corporation as part of her valuation analysis of Frontier. McClure will be using this estimate, along with projected cash flows from Frontier’s new projects, to estimate the effect of these new projects on the value of Frontier. McClure has gathered the following information on Frontier Corporation:

Forecasted for Next Year (USD) Current Year (USD)
50 50 Book value of debt
63 62 Market value of debt
58 55 Book value of shareholders’ equity
220 210 Market value of shareholders’ equity

The weights that McClure should apply in estimating Frontier’s cost of capital for debt and equity are, respectively :

13 / 44

According to the static trade-off theory :

14 / 44

According to the pecking order theory :

15 / 44

Which of the following is true of the growth stage in a company’s development ?

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Which of the following is least likely to be a reason why a firm's actual capital structure may vary from the target capital structure ? 

17 / 44

Companies moving from the start-up stage to the growth stage most likely exhibit increasing :

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Which of these statements is most accurate with respect to the use of debt by a start-up fashion retailer with negative cash flow and uncertain revenue prospects ?

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Which of the following statements most correctly characterizes the pecking order theory of capital structure ?

20 / 44

According to pecking order theory, which of the following lists most accurately orders financing preferences from most to least preferred?

21 / 44

Which of the following statements most accurately characterizes how debt ratings may affect a firm's capital structure policy?

22 / 44

Vega Company has announced that it intends to raise capital next year, but it is unsure as to the appropriate method of raising capital. White, the CFO, has concluded that Vega should apply the pecking order theory to determine the appropriate method of raising capital. Based on White’s conclusion, Vega should raise capital in the following order :

23 / 44

Other factors being equal, in which of the following situations are debt-equity conflicts likely to arise ?

24 / 44

Which of the following statements regarding Modigliani and Miller's Proposition II with taxes is most accurate?

25 / 44

A company’s optimal capital structure :

26 / 44

Which of the following is least likely to affect the capital structure of Longdrive Trucking Company ?

Longdrive has moderate leverage today

27 / 44

Which of the following is least likely to be true with respect to agency costs and senior management compensation ?

28 / 44

Which of the following mature companies is most likely to use a high proportion of debt in its capital structure ?

29 / 44

Tillett Technologies is a manufacturer of high-end audio and video (AV) equipment. The company, with no debt in its capital structure, has experienced rapid growth in revenues and improved profitability in recent years. About half of the company’s revenues come from subscription-based service agreements. The company’s assets consist mostly of inventory and property, plant, and equipment, representing its production facilities. Now, the company seeks to raise new capital to finance additional growth.

Describe two factors that would support Tillett being able to access debt capital at a reasonable cost to finance the additional growth. Justify your response.

30 / 44

Nailah Mablevi is an equity analyst who covers the entertainment industry for Kwame Capital Partners, a major global asset manager. Kwame owns a significant position, with a large unrealized capital gain, in Mosi Broadcast Group (MBG). On a recent conference call, MBG’s management stated that they plan to increase the proportion of debt in the company’s capital structure. Mablevi is concerned that any changes in MBG’s capital structure will negatively affect the value of Kwame’s investment.

To evaluate the potential impact of such a capital structure change on Kwame’s investment, she gathers the information about MBG given in below :

Current Selected Financial Information on MBG
8.00 % Yield to maturity on debt
USD 100 million Market value of debt
10 million Number of shares of common stock
USD 30 Market price per share of common stock
10.30 % Cost of capital if all equity-financed
35 % Marginal tax rate

Which of the following is least likely to be true with respect to optimal capital structure ?

31 / 44

Which of the following is least accurate with respect to the market value and book value of a company’s equity ?

32 / 44

Nailah Mablevi is an equity analyst who covers the entertainment industry for Kwame Capital Partners, a major global asset manager. Kwame owns a significant position, with a large unrealized capital gain, in Mosi Broadcast Group (MBG). On a recent conference call, MBG’s management stated that they plan to increase the proportion of debt in the company’s capital structure. Mablevi is concerned that any changes in MBG’s capital structure will negatively affect the value of Kwame’s investment.

To evaluate the potential impact of such a capital structure change on Kwame’s investment, she gathers the information about MBG given in below :

Current Selected Financial Information on MBG
8.00 % Yield to maturity on debt
USD 100 million Market value of debt
10 million Number of shares of common stock
USD 30 Market price per share of common stock
10.30 % Cost of capital if all equity-financed
35 % Marginal tax rate

MBG is best described as currently :

33 / 44

A company will typically use debt for the largest percentage of its financing during its :

34 / 44

Which of the following is most likely to occur as a company evolves from growth stage to maturity and seeks to optimize its capital structure ?

35 / 44

Under the assumptions of Modigliani and Miller's Proposition I, the value of a firm :

36 / 44

The pecking order theory of financial structure decisions :

37 / 44

The weighted average cost of capital (WACC) for Van der Welde is 10%. The company announces a debt offering that raises the WACC to 13%. The most likely conclusion is that for Van der Welde :

38 / 44

Discuss two financial metrics that can be used to assess a company’s ability to service additional debt in its capital structure .

39 / 44

To determine their target capital structures in practice, it is least likely that firms will :

40 / 44

Compared with managers who do not have significant compensation in the form of stock options, managers who have such compensation will be expected to favor :

41 / 44

The conclusion of Modigliani and Miller's capital structure model with taxes is that :

42 / 44

Which of the following is least accurate with respect to debt-equity conflicts ?

43 / 44

When interest rates have fallen to low levels that are expected to persist, firms are most likely to have a preference for :

44 / 44

Integrated Systems Solutions Inc. (ISS) is a technology company that sells software to companies in the building construction industry. The company’s assets consist mostly of intangible assets. Although the company is profitable, revenue growth and earnings growth have been slowing in recent years. The company’s business model is a pay-per-use model, and given the cyclical nature of the construction industry, the company’s revenues and earnings vary considerably over the business cycle.

Describe two factors that would point to ISS having a relatively high cost of borrowing and low proportion of debt in its capital structure.

 

factors affecting capital structure

the Modigliani–Miller propositions regarding capital structure

Target capital structure

Pecking order theory

stakeholder interests in capital structure decisions

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