Question : 101. When large firms file for bankruptcy, they usually do so : 1284349

101. When large firms file for bankruptcy, they usually do so under an arrangement called: 
A. Chapter 9.
B. Chapter 11.
C. Chapter 13.
D. Chapter 14.

102. In a world with corporate taxes but no possibility of financial distress, the value of the firm is maximized when the: 
A. firm uses no debt in its capital structure.
B. firm uses no equity in its capital structure.
C. firm uses a debt-equity ratio of 1.0.
D. corporate tax rate approaches 100%.

103. If the present value of the tax shield equals the present value of the costs of financial distress, then the: 
A. firm is using the optimal level of debt.
B. firm is paying too high an interest rate.
C. firm’s market value equals the value of the unlevered firm.
D. firm should increase its use of debt.

104. Firms facing financial distress may pass up positive-NPV projects rather than commit new equity because: 
A. they prefer to finance with debt.
B. the benefits may be shared with the bondholders.
C. no cash is available for dividends.
D. there is no interest tax shield associated with equity.

105. A firm’s business risk depends upon: 
A. its use of debt in the capital structure.
B. the risk of the firm’s assets and operations.
C. whether individuals are able to undo the leverage.
D. the costs of financial distress.

106. If a firm’s expected return on equity equals its expected return on assets, then the: 
A. expected return on debt exceeds the expected return on assets.
B. likelihood of financial distress is high.
C. firm has too much debt.
D. firm has no debt in its capital structure.

107. When corporate taxes and the cost of financial distress are taken into consideration, the market value of a firm equals the value if all-equity-financed _____ the PV of the tax shield _____ the costs of financial distress. 
A. plus; plus
B. minus; plus
C. plus; minus
D. minus; minus

108. Which of the following is a safe assumption for a firm in which the PV of the tax shield is approximately equal to the costs of financial distress? 
A. The tax shield has been calculated incorrectly.
B. The firm is too heavily levered financially.
C. The firm has reached its optimal debt level.
D. The firm appears to have low risk of financial distress.

109. The optimal capital structure is met when: 
A. additional borrowing results in lower financial distress costs.
B. additional borrowing is offset by the interest tax shield.
C. the tax savings from additional leverage are offset by the costs of distress.
D. the present value of the tax shield is greater than the value of an all-equity-financed firm.

110. Costs of distress are greater when a large amount of __________ affect(s) the prosperity of the firm. 
A. intangible assets
B. tangible assets
C. net working capital
D. retained earnings

111. According to the trade-off theory, the capital structure is a trade-off between: 
A. tangible and intangible asset risk.
B. high and low target debt ratios.
C. tax savings and financial distress costs.
D. tax shields and equity financing.

112. According to pecking order theory, managers will often choose to finance with: 
A. new equity rather than debt, due to bankruptcy costs.
B. debt rather than new equity, to avoid reduced share price.
C. debt rather than retained earnings, to lower the WACC.
D. new equity rather than debt, to strengthen EPS.

113. Which of the following lists presents the order of financing from most preferred to least preferred according to the pecking order theory? 
A. Debt issue, stock issue, internally generated funds
B. Internally generated funds, debt issue, stock issue
C. Stock issue, internally generated funds, debt issue
D. Internally generated funds, stock issue, debt issue