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Exam 14: Capital Structure and Dividend Policy Decisions

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Question 51

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Business risk is concerned with the operations of the firm.Which of the following is not associated with (or not a part of) business risk?

A) Demand variability.
B) Sales price variability.
C) The extent to which operating costs are fixed.
D) Changes in required returns due to financing decisions.
E) The ability to change prices as costs change.

F) A) and B)
G) A) and C)

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Question 52

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Business risk depends on all of the following factors except ____.

A) sales variability
B) interest rates
C) input price variability
D) change in output prices

E) A) and B)
F) C) and D)

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Question 53

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As the percentage of debt in a firm's capital structure increases,its financial risk increases.Once the firm increases its debt beyond the optimal level,rising interest charges result in an immediate decrease in EPS.

A consistent supply of capital is essential for the long-run success of a firm.Although a firm may have access to capital under all types of economic conditions,the concept of financial flexibility implies that the firm can obtain capital on acceptable,competitive terms.

Your company has decided that its capital budget during the coming year will be $20 million.Its optimal capital structure is 60 percent equity and 40 percent debt.Its earnings before interest and taxes (EBIT) are projected to be $34.667 million for the year.The company has $200 million of assets;its average interest rate on outstanding debt is 10 percent;and its tax rate is 40 percent.If the company follows the residual dividend policy and maintains the same capital structure,what will its dividend payout ratio be?

Which of the following statements is correct?

A firm that follows a residual dividend policy must believe that the dividend irrelevance theory is correct.

One implication of information asymmetry between investors and firm managers is that if a firm raises new capital by issuing debt rather than by selling stock,it signals that the firm has very good prospects.

____ information is the situation in which managers have better information about the firm's prospects.

When a firm conducts a seasoned equity offering and uses the proceeds to purchase a portion of the firm's outstanding debt,then the firm's

The following facts apply to your company: Based on the residual dividend policy,the payout ratio is 60 percent.How large (in millions of dollars) will the capital budget be?

Generally,the more stable a firm's operations,the more debt it can handle in its capital structure.

The ability of a firm to raise sufficient capital on competitive terms under adverse conditions in order to sustain steady operations is referred to as financial flexibility.

Modigliani and Miller's dividend irrelevance theory says that dividend policy does not affect a firm's value but can affect its cost of capital.

The "Pure Modigliani and Miller Result" establishes,under restrictive assumptions,that the firm's stock price will be maximized if it uses virtually 100 percent debt.Which of the following real world conditions does the most to limit real world corporate debt-to-assets ratios to far less than 100 percent?

Which of the following is not a factor that influences capital structure decisions for firms?

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

The optimal capital structure is that which results in the highest earnings per share because that will ensure maximum stock price.

Calculate the current price per share (P₀) for Olson Corporation,given the following information.The data all pertain to the year just ended.

Once the target capital structure for a firm is decided,managerial decisions can result in the actual capital structure differing from the target structure,but operating conditions will have a negligible effect on actual capital structure.