2 2 20. Which of the following statements is correct with regard to the Miller 1977 theory of capital structure? The theory only considers corporate taxes. (16) b. The theory states that there is an optimal capital structure for the economy but not necessarily the fimm. The theory proves that there is an optimal capital structure based on industry classification d. The theory only considers personal taxes. e. The theory predicts that all fimms will be financed through debt ratios of at least 80%. 21. Which of the following statements is nor correct with regard to the "pecking order theory? (16) The theory requires asymmetric information b. The theory is based on the observed behavior of managers, whereby managers select intemal financing first. The theory predicts that firms will issue stock first and then use debt The theory predicts that outside investors will not trust managers insiders and will in turn believe that selling stock will only occur when the stock is overpriced e The theory predicts that outside investors will view the sale of debt to be a good signal because of the managers trying to keep more of the project for themselves. W 22. Which of the following statements is correct? (16) M&M 58 kl and M&M "63 kl are equal b. M&M 58 shows that kilku M&M 63 shows that KL = kad d Miller 77 shows that kat = WACC. e M&M 58 Vu and M&M 63 Vu are equal C d 2. c (15) 23. Which of the following statements is not correct? 2 Airline companies have the ability to issue large amounts of debt 6 Software companies are less likely to have large leverage values. The risk of bankruptcy increases the cost of debt. d. The use of more debt decreases the weighted average cost of capital e Managers try to issue new equity when the stock price is low (15) 24. Which of the following statements is correce? 2 Neutral mutation deals with the changes in capital structure due to changes in management b. Neutral mutation deals with changes in leasing policy due to neutral changes in tax law. Neutral mutation deals with a capital structure that happens for no apparent reason on the part of management d Neutral mutation deals with changes in capital structure due a change in auditors. Neutral mutation deals with changes in dividend policy that happens because of market pressure such as a recession. e 25. Which of the following statements is nor correct concering the Financial Distress model discussed in Chapter 157 The model results in an optimal amount of debt b. As debt increases the probability of bankruptcy increases With small amounts of debt, the value of firm increases due to the deductibility of the interest expense d The model accounts for an increasing cost of debt due to increased chances of insolvency The model predicts that most firms should be 99% debt financed. Oddal 2 2 20. Which of the following statements is correct with regard to the Miller 1977 theory of capital structure? The theory only considers corporate taxes. (16) b. The theory states that there is an optimal capital structure for the economy but not necessarily the fimm. The theory proves that there is an optimal capital structure based on industry classification d. The theory only considers personal taxes. e. The theory predicts that all fimms will be financed through debt ratios of at least 80%. 21. Which of the following statements is nor correct with regard to the "pecking order theory? (16) The theory requires asymmetric information b. The theory is based on the observed behavior of managers, whereby managers select intemal financing first. The theory predicts that firms will issue stock first and then use debt The theory predicts that outside investors will not trust managers insiders and will in turn believe that selling stock will only occur when the stock is overpriced e The theory predicts that outside investors will view the sale of debt to be a good signal because of the managers trying to keep more of the project for themselves. W 22. Which of the following statements is correct? (16) M&M 58 kl and M&M "63 kl are equal b. M&M 58 shows that kilku M&M 63 shows that KL = kad d Miller 77 shows that kat = WACC. e M&M 58 Vu and M&M 63 Vu are equal C d 2. c (15) 23. Which of the following statements is not correct? 2 Airline companies have the ability to issue large amounts of debt 6 Software companies are less likely to have large leverage values. The risk of bankruptcy increases the cost of debt. d. The use of more debt decreases the weighted average cost of capital e Managers try to issue new equity when the stock price is low (15) 24. Which of the following statements is correce? 2 Neutral mutation deals with the changes in capital structure due to changes in management b. Neutral mutation deals with changes in leasing policy due to neutral changes in tax law. Neutral mutation deals with a capital structure that happens for no apparent reason on the part of management d Neutral mutation deals with changes in capital structure due a change in auditors. Neutral mutation deals with changes in dividend policy that happens because of market pressure such as a recession. e 25. Which of the following statements is nor correct concering the Financial Distress model discussed in Chapter 157 The model results in an optimal amount of debt b. As debt increases the probability of bankruptcy increases With small amounts of debt, the value of firm increases due to the deductibility of the interest expense d The model accounts for an increasing cost of debt due to increased chances of insolvency The model predicts that most firms should be 99% debt financed. Oddal