1.

Financial distress costs should include all of the following except I. direct bankruptcy costs II. indirect bankruptcy costs III. flotation costs related to bond issuance IV. direct costs related to being financially distressed, but not bankrupt V. indirect costs related to being financially distressed, but not bankrupt

I only

III only

I, II, III, and IV only

I and II only

III and IV only

2. Mary had bought some shares of the Queen Facial stock. Queen Facial is currently an unlevered firm. In order to lever her position, Mary was advised to:

create a personal debt-equity ratio of 0.30.

borrow some money and purchase additional shares of the Queen Facial stock.

sell some shares of the Queen Facial stock and loan out the proceeds.

sell some shares of the Queen Facial stock and hold the proceeds in cash.

maintain her current equity position as the debt of the firm did not affect her personally.

3. Which of the following statements related to cash dividends is/are correct?

I. Extra cash dividends will never be repeated by a firm. II. The dividend yield expresses the annual dividend as a percentage of net income. III. A dividend is never a liability until it has been declared. IV. If a firm has paid regular quarterly dividends for at least five consecutive years it is legally obligated to continue doing so. V. Regular cash dividends reduce paid-in capital.

III only

II, III and IV only

I, II and IV only

I and III only

II and V only