1. .

1. Which of the following factors is NOT relevant when establishing an optimal capital structure?
   1. Taxes
   2. Cost of financial distress
   3. Amount of dividends distributed
   4. Agency costs

Answer:______

1. Which of the following statements is NOT true?
   1. The capital structure decision affects a firms profitability measured by the EPS.
   2. Financial leverage increases EPS, as long as the ROA (return on assets) is lower than the cost of debt.
   3. Variations on EPS can be the result of changes in general economic conditions.
   4. Variations on EPS can be the result of factors affecting the industry to which a firm belongs.

Answer:______

1. Which of the following statements is NOT true for business risk?
   1. Business risk is risk generated from changes in the business environment of a firm.
   2. Examples of business risks are technology and competition.
   3. Business risk increases in function to the amount of funds a firm borrows.
   4. Business risk is independent of a firms capital structure.

Answer:______

1. Which of the following statements is true in a scenario of no corporate income tax and no financial distress?
   1. A firms financial structure decision affects the market value of its assets and its share price, but not its weighted average cost of capital.
   2. A firms financial structure decision does not affect the market value of its assets, its share price, or its weighted average cost of capital.
   3. A firms financial structure decision affects the market value of its assets, its share price, and its weighted average cost of capital.
   4. A firms financial structure decision does not affect the market value of its assets and its share price, but affects its weighted average cost of capital.

Answer:______

1. Which of the following statements is true in a scenario of corporate income tax but no financial distress?
   1. When more debt replaces equity in the firms capital structure, the value of the firms assets and its share price increase, whereas its WACC decreases.
   2. When more debt replaces equity in the firms capital structure, the value of the firms assets and its share price decreases, whereas its WACC increases.
   3. When more debt replaces equity in the firms capital structure, the value of the firms assets, its share price, and its WACC decrease.
   4. When more debt replaces equity in the firms capital structure, the value of the firms assets and its share price increase, and its WACC increases.

Answer:______

1. Which of the following statements is NOT true for financial distress costs?
   1. Financial distress impacts a firms value and its share price.
   2. Debt holders bear most of the financial distress costs.
   3. Financial distress is related to increasing difficulties to service the debt, both interest and principal payments.
   4. Financial distress can lead a firm into bankruptcy.

Answer:______,

1. .
2. Which of the following is NOT an example of direct costs of financial distress?
   1. Legal and administrative costs
   2. Lawyers fees
   3. Loss of clients
   4. Consultants fees

Answer:______

1. How large is the present value of expected costs of financial distress in relation to a firms assets?
   1. Between 5 to 10% of the value of a firms assets several years before filing for bankruptcy.
   2. Between 10 to 15% of the value of a firms assets several years before filing for bankruptcy.
   3. Between 15 to 20% of the value of a firms assets several years before filing for bankruptcy.
   4. Between 20 to 25% of the value of a firms assets several years before filing for bankruptcy.

Answer:______

1. According to the trade-off model of capital structure:
   1. a firm reaches its optimal capital structure when its WACC is at its minimum, its debt to equity ratio is at its optimal value, and the value of the firms assets and its share price are maximized.
   2. a firm reaches its optimal capital structure when its WACC is at its maximum, its debt to equity ratio is at its minimum value, and the value of the firms assets and its share price are maximized.
   3. a firm reaches its optimal capital structure when its WACC is at its minimum, its debt to equity ratio is at its minimum value, and the value of the firms assets and its share price are maximized.
   4. a firm reaches its optimal capital structure when its WACC is at its maximum, its debt to equity ratio is at its optimal value, and the value of the firms assets and its share price are maximized.

Answer:______

1. .

1. Which of the following statements is correct for the effect of personal taxes?
   1. Personal tax rate on equity income is generally higher than that on interest income because capital gains are usually taxed at a higher rate than interest income. In this case the annual interest shield is higher than when personal taxes are not considered.
   2. Personal tax rate on equity income is generally higher than that on interest income because capital gains are usually taxed at a higher rate than interest income. In this case the annual interest shield is lower than when personal taxes are not considered.
   3. Personal tax rate on equity income is generally lower than that on interest income because capital gains are usually taxed at a lower rate than interest income. In this case the annual interest shield is lower than when personal taxes are not considered.
   4. Personal tax rate on equity income is generally lower than that on interest income because capital gains are usually taxed at a lower rate than interest income. In this case the annual interest shield is higher than when personal taxes are not considered.

Answer:______

1. Which of the following statements is true?
   1. A firm with high business risk faces a higher probability of experiencing financial distress than a firm that has a stable operating cash flow, assuming both firms have the same debt ratio.
   2. A firm with high business risk faces a lower probability of experiencing financial distress than a firm that has a stable operating cash flow, assuming both firms have the same debt ratio.
   3. A firm with high business risk faces a lower probability of experiencing financial distress than a firm that has a stable operating cash flow, assuming the firms have unequal debt ratios.
   4. A firm with high business risk faces a higher probability of experiencing financial distress than a firm that has a stable operating cash flow, assuming both firms have unequal debt ratios.

Answer:______

1. Which of the following industries tends to have high debt ratios?
   1. Research and consulting services
   2. Semiconductors
   3. Automotive retailers
   4. Biotechnology

Answer:______

1. Which of the following industries tends to have low debt ratios?
   1. Gas utilities
   2. Department stores
   3. Household products
   4. Consumer electronics

Answer:______

1. Which of the following statements is true?
   1. Firms with high business risk can afford higher financial risk, consequently higher debt ratios, than firms with low business risk.
   2. Firms with low business risk can afford higher financial risk, consequently higher debt ratios, than firms with high business risk.
   3. Firms with low business risk can afford higher financial risk, consequently lower debt ratios, than firms with high business risk.
   4. Firms with high business risk can afford higher financial risk, consequently lower debt ratios, than firms with low business risk.

Answer:______

1. Which of the following factors may NOT favor borrowing?
   1. Debt helps reduce the agency costs arising from the separation of ownership from control.
   2. Debt allows current owners to retain control.
   3. Debt increases the problem of information asymmetry between managers and outside investors.
   4. Tax advantages of debt finance.

Answer:______

1. If you were to establish a pecking order, what is a firms preference for financing?
   1. Retained earnings, followed by debt, followed by new equity
   2. Debt, followed by retained earnings, followed by new equity
   3. New equity, followed by retained earnings, followed by debt
   4. Retained earnings, followed by new equity, followed by debt

Answer:______

1. Which is the primary factor favoring borrowing?
   1. Agency costs of equity
   2. Retention of control
   3. Corporate income tax
   4. Information asymmetry

Answer:______

1. Which is the primary factor discouraging excessive borrowing?
   1. Agency costs of debt
   2. Cost of financial distress
   3. Financial flexibility
   4. Dividend policy

Answer:______

1. The ratio of equity financing to total assets of a large sample of US corporations from 1945 to 2017 has:
   1. declined in equity finance from 75% to between 50 to 60% since early 1980.
   2. declined in equity finance from 65% to between 40 to 50% since early 1980.
   3. increased in equity finance from between 50 to 60% to 75% since early 1980.
   4. increased in equity finance from between 40 to 50% to 65% since early 1980.

Answer:______

1. Survey results among chief financial officers indicated that the most important factors they refer to when deciding the debt level of their companies are:
   1. tax advantage of interest payments.
   2. financial flexibility and avoidance of credit rating downgrades.
   3. cost of financial distress.

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