The Pecking Order Theory of capital structure implies a unique optimum capital structure.
The cost of debt is generally lower than the cost of equity. Top of Form True False Bottom of Form M&M’s Proposition I states that a company’s value is independent of its capital structure. Top of Form True False Bottom of Form A higher level of leverage generally reduces managerial discretion. Top of Form True False Bottom of Form The Pecking Order Theory of capital structure implies a unique optimum capital structure. Top of Form True False Bottom of Form As EBIT drops, the return on equity (ROE) of a levered firm drops ______ the ROE of an otherwise identical unlevered firm. Top of Form the same as relatively more than relatively less than more or less than (it cannot be determined) Bottom of Form Shareholders prefer high risk projects when facing a high probability of bankruptcy because Top of Form High risk projects usually bring high rewards. Shareholders have the residual claim on a company. Creditors have the residual claim on a company, and therefore bear the risk. There is a good chance the government will rescue them in bankruptcy. Bottom of Form The _________ states that the value of the firm is determined solely by the value of its assets. Top of Form Static Tradeoff Model M&M proposition I The Pecking Order Model Agency Theory Bottom of Form Which of the following expresses the value of a levered firm (VL) in the Static Tradeoff model of optimal capital structure? [Note: VU denotes the value of the unlevered firm; CFD denotes expected costs of financial distress; and PV denotes present value.] Top of Form VL = PV(Tax Shield) – PV(CFD) VL = VU + PV(Tax Shield) / PV(CFD) VL = VU + PV(Tax Shield) – PV(CFD) VL = VU + PV(Tax Shield) Bottom of Form A example of indirect costs of bankruptcy is Top of Form Court costs Attorney and advisor fees Lost sales due to costumers and suppliers lost trust All of the above Bottom of Form […]
