16.5 Optimal Capital Structure: The Tradeoff Theory

7) The probability of financial distress depends on the ________.

A) likelihood that a firm will be unable to meet its debt commitments

B) chance that a firm's raw material costs will increase

C) likelihood of dividend payments

D) likelihood of asset growth

16.6 Additional Consequences of Leverage: Agency Costs and Information

8) When a firm's investment decisions have different consequences for the value of equity and the value of debt, managers may take actions ________.

A) to increase debt values

B) to decrease costs of distress

C) that benefit shareholders at the expense of debt holders

D) to reduce fixed costs

16.7 Capital Structure: Putting It All Together

9) Managers should consider ________ for external financing when agency costs are significant.

A) long-term debt

B) retained earnings

C) internal equity

D) short-term debt

10) The optimal capital structure depends on ________ such as taxes, distress costs and agency costs.

A) capital market factors

B) market imperfections

C) firm specific risks

D) systematic risks