367 test 2 tf ch 15 – Flashcards
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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
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True
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Whenever a firm borrows money, it is using financial leverage.
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True
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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.
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False
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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
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False
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The trade-off theory states that the capital structure decision involves a tradeoff between the costs and benefits of debt financing
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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
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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
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False
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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.
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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
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True
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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
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True
