Corporate Finance Final Exam Questions with Complete Solutions

Debt, equity - ANSWER-The value of a firm is defined to be the sum of the value of the firm's ______ and the firm's ______. Homogeneous expectations Homogeneous business risk classes Perpetual cash flows Perfect Capital markets - ANSWER-Assumptions of the M&M Model capital structure - ANSWER-Changes in ________ _________ primarily benefit the stockholders if the value of the firm increases. levered - ANSWER-A _______ firm pays less in taxes than an all-equity firm does. greater - ANSWER-The sum of the debt plus the equity of a levered firm is ________ than the equity of the unlevered firm. unaffected - ANSWER-In a world of no taxes, the value of the firm is __________ by capital structure. increases - ANSWER-In a world of no taxes and taxes, M&M Proposition II states that leverage ___________ the risk and return to stockholders. increases - ANSWER-In a world of taxes, but no bankruptcy costs, the value of the firm __________ with leverage. homemade leverage - ANSWER-In a world of taxes, Proposition I holds because shareholders can achieve any pattern of payouts they desire with ____________________________. stockholders - ANSWER-The costs associated with bankruptcy lowers the value of the firm. ___________ bear these costs. Legal and administrative costs - ANSWER-Direct costs of bankruptcy. Impaired ability to conduct business (e.g. lost sales) - ANSWER-Indirect costs of bankrupcty. - Incentive to take large risks - Incentive toward underinvestment - Milking the property - ANSWER-Agency costs of bankruptcy.