1. In making Capital Structure decisions, the overall objective is to:
1- minimize the total amount of dividends and interest the firm needs to pay
2- maximize the tax deductions the firm receives for interest expense
3- improve cash flows as much as possible
4- minimize the firm's WACC
2. Which of the below statements is true?
1- corporations cannot make dividend payments to both common and preferred shareholders during the same year
2- Debt is normally a less expensive form of capital than equity
3- both interest expense and dividend payments are tax deductible for the firm making them
4- Equity financing is permanent financing, while debt financing is temporary financing
3. As a firm's debt increases, its _______________ also increases. This makes the firm more risky and tends to increase the firm's _____.
1- market value / expected return
2- expected return / expected dividend payout
3- leverage / beta
4- systematic risk / unsystematic risk
4. A capital lease incurs tax deductible interest expense. An operating lease is not tax deductible.
True
False
5. The only form of financing considered 'free' are the accounts payable and accrued expenses balances.
True
False
6. The 'optimal' capital structure is the one under which the firm has roughly equal dollar amounts of equity financing and long-term debt financing.
True
False
7. A type of financing that involves one corporation borrowing from another non-financial corporation is called:
1- an operating lease
2- a short term line of credit
3- commercial paper
4- preferred sharing
8. Past the point where the optimal capital structure exists, adding debt to the capital structure:
1- results in higher interest rates for the firm, and higher leverage. The higher leverage results in a riskier firm with a higher cost of equity.
2- violates SEC regulations if the excess debt is considered permanent.
3- results in the excess debt's interest not being tax deductible
4- Reduces the firms cost of equity
9. Under a capital lease, the firm is deemed to have purchased the equipment being leased, and to have financed the purchase with interest-bearing debt.
True
False
10. All short-term debt is considered temporary financing.
True
False