Question Details

If you know that your firm is facing relatively poor prospects but needs new capital


 .	If you know that your firm is facing relatively poor prospects but needs new capital, and you 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.	Be indifferent between issuing debt and equity.
d.	Postpone going into capital markets until your firm- prospects improve.
e.	Convey your inside information to investors using the media to eliminate the information asymmetry. 

 .	Which of the following statements is most correct?

a.	The optimal capital structure minimizes the WACC.
b.	If the after-tax cost of equity financing exceeds the after-tax cost of debt financing, firms are always able to reduce their WACC by increasing the amount of debt in their capital structure.
c.	Increasing the amount of debt in a firm- capital structure is likely to increase the costs of both debt and equity financing.
d.	Statements a and c are correct.
e.	Statements b and c are correct.

 .	Which of the following statements is most correct?

a.	A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, the cost of retained earnings is generally lower than the after-tax cost of debt financing. 
b.	The capital structure that minimizes the firm- weighted average cost of capital is also the capital structure that maximizes the firm- stock price.
c.	The capital structure that minimizes the firm- weighted average cost of capital is also the capital structure that maximizes the firm- earnings per share.
d.	If a firm finds that the cost of debt financing is currently less than the cost of equity financing, an increase in its debt ratio will always reduce its weighted average cost of capital.
e.	Statements a and b are correct.

 .	Which of the following statements is most correct?

a.	In general, a firm with low operating leverage has a small proportion of its total costs in the form of fixed costs.
b.	An increase in the personal tax rate would not affect firms’ capital structure decisions.
c.	A firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else equal.
d.	Statements a and b are correct.
e.	All of the statements above are correct.

 .	Which of the following statements is correct?

a.	“Business risk” is differentiated from “financial risk” by the fact that financial risk reflects only the use of debt, while business risk reflects both the use of debt and such factors as sales variability, cost variability, and operating leverage.
b.	If corporate tax rates were decreased while other things were held constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital structure were correct, this would tend to cause corporations to increase their use of debt.
c.	If corporate tax rates were decreased while other things were held constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital structure were correct, this would tend to cause corporations to decrease their use of debt.
d.	The optimal capital structure is the one that simultaneously 
(1) maximizes the price of the firm- stock, (2) minimizes its WACC, and (3) maximizes its EPS.
e.	None of the statements above is correct.




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