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<strong>FIN</strong> <strong>405</strong> <strong>Week</strong> 7 <strong>Quiz</strong><br />
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<strong>FIN</strong> <strong>405</strong> <strong>Week</strong> 7 <strong>Quiz</strong><br />
1. The relationship of corporate income taxes, personal income taxes on equity investments, and<br />
personal income taxes on interest income should have a predictable change in debt ratios; which of the<br />
following predicts increasing debt ratios?<br />
2. PureMeds is a highly profitable pharmaceutical company that places great importance on funding<br />
research and development projects. According to finance research, the expected capital structure for<br />
PureMeds:<br />
3. M & M Proposition II says that the WACC is not influenced by changing the mix of debt and equity<br />
because changes in leverage cause an offsetting change in the __________.<br />
4. When M & M assume that capital markets are frictionless it means all of the following except:<br />
5. Given an increase in personal tax rates on both dividends and interest income, companies should:<br />
6. According to M&M’s Proposition II the expected return on a levered firm’s equity<br />
7. Firms in the __________ industry(ies) use a great deal of debt.<br />
8. __________ firms use almost no debt in their capital structure.<br />
9. In a frictionless capital market, if the market value of a levered firm's outstanding securities differs from<br />
the market value of an otherwise identical all-equity firm's outstanding securities, M & M demonstrate that:<br />
10. Financial leverage<br />
11. Macrohard holds cash and marketable securities worth over $20 billion. It is a highly profitable<br />
firm, yet maintains a low leverage level and pays out very little profit in the form of dividends. Macrohard's<br />
industry is characterized by numerous positive-NPV opportunities, but management is reluctant to issue<br />
equity in order to finance investments. Which of the following best accounts for Macrohard's leverage<br />
decisions?<br />
12. Firms with sufficient __________ will not have to issue equity securities to finance investment<br />
projects and are thus able to finesse information problems between managers and investors.<br />
13. A firm that is in financial distress<br />
14. Which of the following would lead to an increase in leverage in a firm's optimal capital<br />
structure according to the agency cost/tax shield trade-off model?<br />
15. The corporate form of organization:<br />
16. __________ companies use far more debt than do growth companies.<br />
17. According to the signaling theory of capital structure, a firm concerned about increasing its<br />
stock price should:<br />
18. The __________ problem prevents the financing of new positive-NPV projects because the<br />
benefits would accrue to existing creditors rather than to the shareholders who finance the new project.<br />
19. Which of the following presents a problem for the signaling theory of capital structure?<br />
20. The __________ argues that firms attempt to time the market by issuing equity when share<br />
values are high and by issuing debt when share prices are low.
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