Corporate Finance Study Set 12

Business

Quiz 17 :

Capital Structure: Limits to the Use of Debt

Quiz 17 :

Capital Structure: Limits to the Use of Debt

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Conflicts of interest between stockholders and bondholders are known as:
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D

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Junk bonds is a term used to describe bonds:
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E

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When shareholders pursue selfish strategies such as taking large risks or paying excessive dividends, these will result in:
Free
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Answer:

B

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The TrunkLine Company will earn $60 if it does well. The debtholders are promised payments of $35 if the firm does well. If the firm does poorly the repayment will be $20 because of the dead weight cost of bankruptcy, expected earnings will be $30. The probability of the firm performing poorly or well is 50%. If bondholders are fully aware of these costs what will they pay for the debt? The interest rate on the bonds is 10%.
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Indirect costs of financial distress:
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The main difference between a positive and negative covenants is(are):
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The value of a firm in financial distress is diminished if the firm:
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If the firm issues debt but writes protective and restrictive covenants into the loan contract, then the debt may be issued at a(an) _____ interest rate compared with otherwise similar debt.
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One of the indirect costs of bankruptcy is the incentive for managers to take large risks. When following this strategy, the firm will:
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Given realistic estimates of the probability and cost of bankruptcy, the future costs of a possible bankruptcy are borne by:
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Although the use of debt provides tax benefits to the firm, debt also puts pressure on the firms to:
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The optimal capital structure has been achieved when the:
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Covenants restricting the use of leasing and additional borrowings primarily protect:
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One of the indirect costs to bankruptcy is the incentive toward underinvestment. Following this strategy may result in:
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TL Company has expected earnings of $75 in one year if it does well and $25 if it does poorly. The firm has outstanding debt of $50 that is due in one year. However, given the financial distress costs, the debtholders will only receive $40 in one year if the firm does well and $15 if it does poorly. There is a 60 percent chance the firm will do well and a 40 percent chance that it will do poorly. What is the current value of the debt if the interest rate on bonds is 8 percent?
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The TrunkLine Company debtholders are promised payments of $35 if the firm does well, but will receive only $20 if the firm does poorly. If the bonds are selling at a price of $25, the promised return to the bondholders is approximately:
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While difficult to determine exactly, Lawrence A. Weiss estimated the distress costs to be about ____________ of firm value.
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The possibility of bankruptcy has a negative effect on the value of the firm because:
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When graphing firm value against debt levels, the debt level that maximizes the value of the firm is the level where:
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Indirect costs of bankruptcy are born principally by:
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