Question Details

Capital Structure and Leverage


16. Suppose you know that your firm is facing relatively poor prospects but needs new capital.  If you also know that investors do not have this information, signaling theory would predict that you would:
a. issue debt to maintain the returns of equity holders.
b. issue equity to share the burden of decreased equity returns between old and new shareholders.
c. both a and b are correct


17. Which of the following is likely to encourage a company to use more debt in its capital structure?
a. A decrease in the variability of sales.
b. An increase in the liquidity of the firm- assets.
c. A decrease in the company- degree of operating leverage.
d. all of the above


18. Which of the following factors is likely to encourage a corporation to increase the proportion of debt in its capital structure?
a. An increase in the corporate tax rate.
b. An increase in the ordinary income tax rate relative to the capital gains tax rate.
c. An increase in the company- degree of operating leverage.



19. The ability to borrow money at a reasonable cost when good investment opportunities arise is called:
a. symmetric information.
b. asymmetric information.
c. capital structure.
d. reserve borrowing capacity.



20. A high debt ratio raises the threat of bankruptcy, but it can also force managers to be more careful and less wasteful.
a. True
b. False



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