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Chapter 16

Quiz yourself by thinking what should be in each of the black spaces below before clicking on it to display the answer.
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Question
Answer
A company should select the capital structure that _____   show
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show it increases the value of the firm  
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The value of the firm is maximized when the weighted average cost of capital (WACC) is _____.   show
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The value of a firm is equal to the value of its _____.   show
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Financial leverage affects the performance of a firm because the range of possible values for ___.   show
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show the firm's mix of debt and equity  
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Volatility or ______ increases for equity holders when leverage increases.   show
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show the firm's value is maximized  
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An individual can duplicate a levered firm through a strategy called ____ where the investor uses his own funds plus borrowed funds to buy stocks.   show
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show minimized  
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According to M&M Proposition I, a firm's capital structure choices _____.   show
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______ is the term that describes the capital structure when debt is used to finance assets.   show
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An investor who invests in the stock of a levered firm rather than in an all-equity firm will require:   show
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Which of the following statements are true regarding the effect of financial leverage and the firm's operating earnings?   show
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Under M&M Proposition II with no taxes, the weighted average cost of capital is invariant to the debt level because ___.   show
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The expected return on equity is _____ to leverage.   show
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Which of the following are generally true about the cost of equity and the cost of debt?   show
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With ____, an investor is able to replicate a corporation's capital structure by borrowing funds and using those funds along with her own money to buy the company's stock.   show
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The equity risk that comes from the nature of a firm's operating activities is known as _____ risk.   show
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show MM demonstrated that debt financing is neither better nor worse than equity financing in the absence of taxes the asset to be financed is the same  
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show false  
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show the cost of equity rises with leverage.  
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In 2019, the net interest deduction is limited to what percent of EBITDA?   show
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show the overall cost of capital cannot be reduced as debt is added, the equity becomes more risky  
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When calculating the cash flow for a levered firm, you must consider _____.   show
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The WACC is the cost of ______ times its weight in the capital structure plus the cost of ______ times its weight in the capital structure   show
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show It provides a tax benefit.  
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The equity risk that comes from the financial policy or capital structure decisions of the firm is known as _____ risk.   show
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show Value of Levered Firm = Value of Unlevered Firm + Tax Benefit of Debt  
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An unlevered firm ____.   show
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In the presence of corporate taxes, the tax shield effect of debt will ____ the value of the firm.   show
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According to the Tax Cuts and Jobs Act of 2017, after 2021, the net interest deduction drops to what percent of EBIT?   show
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show lower.  
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show Corporate tax rates are zero. The corporation has no debt. The corporation is an all-equity fir  
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Which of these statements is true regarding corporate capital structures?   show
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show plus the tax rate times the value of debt  
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show levered firms pay lower taxes than unlevered firms  
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