Leverage/Optimal Capital Structure MyFinanceLab – Flashcards

Accounting break-even analysis uses... A. sales, variable costs and fixed costs over the entire life of a project B. free cash flows over the entire life of a project C. free cash flows for a single period D. sales, variable cost and fixed costs for a single period

When the impact of taxes is considered, as the firm takes on more debt..... A. both taxes and total cash flow to stockholders and bondholders will decrease B. there will be no change in total cash flows C. cash flows will increase because taxes will decrease

An optimal capital structure is achieved.... A. when a firm's expected EPS are maximized B. when a firm's weighted average cost of capital is minimized C. when a firm's expected profits are maximized

Which of the following is a reasonable conclusion from the Tradeoff theory of capital structure? A. A high debt ratio will result in a maximum price of a firm's common stock B. A low debt ratio will result in a maximum price for a firm's common stock C. Modest levels of debt have a more favorable impact on a firm's average cost of capital and stock price than no debt

If interest expense lowers taxes, why does the WACC not decrease indefinitely with the addition of more debt? A. A firm's common stock price will not be affected by the amount of debt a firm uses B. The tax shield effect of debt will result in lower cost of equity C. Increasing debt too much can result in a greater likelihood of firm failure (financial distress)

The inclusion of bankruptcy costs and taxes in firm valuation.... A. is consistent with a saucer-shaped cost of capital curve B. causes the cost of capital curve to be umbrella shaped C. causes the cost of capital to rise in a linear fashion as more debt is added to the capital structure