Strayer FIN534 Week 8 Homework Assignment Chapter 15

FIN 534 Week 8 Homework
Assignment Chapter 15
1. The firm’s target capital
structure should be consistent with which of the following statements?
a. Minimize the cost of debt (rd).
b. Obtain the highest possible
bond rating.
c. Minimize the cost of equity (rs).
d. Minimize the weighted average
cost of capital (WACC).
e. Maximize the earnings per
share (EPS).
2. Which of the following
statements is CORRECT?
a. The factors that affect a
firm’s business risk are affected by industry characteristics and economic
conditions. Unfortunately, these factors are generally beyond the control of
the firm’s management.
b. One of the benefits to a firm
of being at or near its target capital structure is that this eliminates any
risk of bankruptcy.
c. A firm’s financial risk can be
minimized by diversification.
d. The amount of debt in its
capital structure can under no circumstances affect a company’s business risk.
e. A firm’s business risk is
determined solely by the financial characteristics of its industry.
3. Which of the following
statements is CORRECT? As a firm increases the operating leverage used to
produce a given quantity of output, this will
a. normally lead to a decrease in
its business risk.
b. normally lead to a decrease in
the standard deviation of its expected EBIT.
c. normally lead to a decrease in
the variability of its expected EPS.
d. normally lead to a reduction
in its fixed assets turnover ratio.
e. normally lead to an increase
in its fixed assets turnover ratio.
4. If debt financing is used,
which of the following is CORRECT?
a. The percentage change in net
operating income will be equal to a given percentage change in net income.
b. The percentage change in net
income relative to the percentage change in net operating income will depend on
the interest rate charged on debt.
c. The percentage change in net
income will be greater than the percentage change in net operating income.
d. The percentage change in sales
will be greater than the percentage change in EBIT, which in turn will be
greater than the percentage change in net income.
e. The percentage change in net
operating income will be greater than a given percentage change in net income.
5. Which of the following
statements is CORRECT, holding other things constant?
a. An increase in the personal
tax rate is likely to increase the debt ratio of the average corporation.
b. If changes in the bankruptcy
code make bankruptcy less costly to corporations, then this would likely reduce
the debt ratio of the average corporation.
c. An increase in the company’s
degree of operating leverage is likely to encourage a company to use more debt
in its capital structure.
d. An increase in the corporate
tax rate is likely to encourage a company to use more debt in its capital
structure.
e. Firms whose assets are
relatively liquid tend to have relatively low bankruptcy costs, hence they tend
to use relatively little debt.