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Chapter 12—Capital Structure MULTIPLE CHOICE
1. The uncertainty caused by the variability of a firm’s cash flows is called . . .
a. financial risk
b. business risk
c. financial leverage
d. none of the above
ANS: B DIF: E
REF: 12.2 The Modigliani & Miller Capital Structure Irrelevance Propositions
2. Which of the following is considered an indirect cost of bankruptcy?
a. document printing expenses
b. professional fees paid to lawyers
c. loss of key employees
d. none of the above
ANS: C DIF: E
REF: 12.4 The Agency Cost/Tax Shield Trade-Off Model of Corporate Leverage
3. Which of the following is considered a direct cost of bankruptcy?
a. diversion of management’s time
b. constrained capital investment spending
c. lost sales
d. none of the above
ANS: D DIF: E
REF: 12.4 The Agency Cost/Tax Shield Trade-Off Model of Corporate Leverage
4. A situation where shareholders refuse financing a “good” investment, because they think that only the bondholders will benefit will lead to . . .
a. asset substitution
b. underinvestment
c. overinvestment
d. none of the above
ANS: B DIF: E
REF: 12.4 The Agency Cost/Tax Shield Trade-Off Model of Corporate Leverage
5. The proposition that the market value of the firm is independent of its capital structure is called . . .
a. M&M proposition I
b. M&M proposition II
c. the capital asset pricing model
d. none of the above
ANS: A DIF: E
REF: 12.2 The Modigliani & Miller Capital Structure Irrelevance Propositions
NARRBEGIN: Bavarian Brew
Bavarian

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