MBA 702 Kendall Mod 6 concept study
guide Questions and Answers.
Which one of the following is the equity risk that is most related to the daily operations of a
firm? - Answer business risk
Which one of the following states that a firm's cost of equity capital is directly and
proportionally related to the firm's capital structure? - Answer M & M Proposition II
Which one of the following is the equity risk related to a firm's capital structure policy? - Answer
financial
The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs. -
Answer indirect bankruptcy
A firm should select the capital structure that minimizes taxes - Answer false
The optimal capital structure has been achieved when the - Answer debt-equity ratio results
in the lowest possible weighted average cost of capital.
AA Tours is comparing two capital structures to determine how to best finance its operations.
The first option consists of all equity financing. The second option is based on a debt-equity
ratio of 0.45. What should AA Tours do if its expected earnings before interest and taxes (EBIT)
are less than the break-even level? Assume there are no taxes. - Answer select the unlevered
option since the expected EBIT is less than the break-even level
The business risk of a firm is dependent upon the relative weights of the debt and equity used
to finance the firm. - Answer false
The capital structure that maximizes the value of a firm also: - Answer minimizes the cost of
capital
The key dividend policy(ies) discussed in the lecture notes were - Answer Stable dividend
policy and Residual dividend policy
The trade-offs that a firm needs to consider in its dividend policy are - Answer internal vs.
external financing fund availability
guide Questions and Answers.
Which one of the following is the equity risk that is most related to the daily operations of a
firm? - Answer business risk
Which one of the following states that a firm's cost of equity capital is directly and
proportionally related to the firm's capital structure? - Answer M & M Proposition II
Which one of the following is the equity risk related to a firm's capital structure policy? - Answer
financial
The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs. -
Answer indirect bankruptcy
A firm should select the capital structure that minimizes taxes - Answer false
The optimal capital structure has been achieved when the - Answer debt-equity ratio results
in the lowest possible weighted average cost of capital.
AA Tours is comparing two capital structures to determine how to best finance its operations.
The first option consists of all equity financing. The second option is based on a debt-equity
ratio of 0.45. What should AA Tours do if its expected earnings before interest and taxes (EBIT)
are less than the break-even level? Assume there are no taxes. - Answer select the unlevered
option since the expected EBIT is less than the break-even level
The business risk of a firm is dependent upon the relative weights of the debt and equity used
to finance the firm. - Answer false
The capital structure that maximizes the value of a firm also: - Answer minimizes the cost of
capital
The key dividend policy(ies) discussed in the lecture notes were - Answer Stable dividend
policy and Residual dividend policy
The trade-offs that a firm needs to consider in its dividend policy are - Answer internal vs.
external financing fund availability
