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Home Page Social Science Economics Finance Earnings Per Share 367 test 2 tf ch 15 - Flashcards

367 test 2 tf ch 15 – Flashcards

Alicia Bennett
8 July 2022
14 test answers

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question
Different borrowers have different risks of bankruptcy, and bankruptcy is costly to lenders. Therefore, lenders charge higher rates to borrowers judged to be more at risk of going bankrupt.
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True
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A firm's business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses
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False
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Financial risk refers to the extra risk stockholders bear as a result of using debt as compared with the risk they would bear if no debt were used.
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True
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As the text indicates, a firm's financial risk has identifiable market risk and diversifiable risk components
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False
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A firm's capital structure does not affect its calculated free cash flows, because FCF reflects only operating cash flows
answer
True
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question
Whenever a firm borrows money, it is using financial leverage.
answer
True
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question
The graphical probability distribution of ROE for a firm that uses financial leverage would tend to be more peaked than the distribution if the firm used no leverage, other things held constant.
answer
False
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question
Provided a firm does not use an extreme amount of debt, financial leverage typically affects both EPS and EBIT, while operating leverage only affects EBIT
answer
False
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question
The trade-off theory states that the capital structure decision involves a tradeoff between the costs and benefits of debt financing
answer
True
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If a firm utilizes debt financing, an X% decline in earnings before interest and taxes (EBIT) will result in a decline in earnings per share that is larger than X
answer
True
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Firm A has a higher degree of business risk than Firm B. Firm A can offset this by using less financial leverage. Therefore, the variability of both firms' expected EBITs could actually be identical
answer
False
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question
Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk.
answer
False
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It is possible that two firms could have identical financial and operating leverage, yet have different degrees of risk as measured by the variability of EPS
answer
True
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question
If Miller and Modigliani had incorporated the costs of bankruptcy into their model, it is unlikely that they would have concluded that 100% debt financing is optimal
answer
True
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What is the right structure for an essay
Answer
A paragraph is a related group of sentences that develops one main idea. Each paragraph in the body of the essay should contain:
  • a topic sentence that states the main or controlling idea
  • supporting sentences to explain and develop the point you’re making
  • evidence from your reading or an example from the subject area that supports your point
  • analysis of the implication/significance/impact of the evidence finished off with a critical conclusion you have drawn from the evidence.