Question

19. Pacific Postal Service has twice as much equity as debt in its capital structure. Which of the following is correct regarding Pacific Postal Service's capital structure?

a. 33.3% equity.

b. 40.0% debt.

c. 66.7% equity.

d. 75.0% debt.

20. If you have a project combined with above-average market risk, which one of the following decisions should you make?

a. Accept if the IRR is greater than the WACC.

b. Accept if the cash flows discounted at the WACC have a positive NPV.

c. Discount the cash flows at the IRR and accept if NPV is positive.

d. Use a higher discount rate than the WACC to reflect the project's risk and accept if NPV is positive at this higher discount rate.

21. Which of the following items will NOT change due to the cost of financial distress?

a. Cost of legal fees

b. Cost of goods sold

c. Cost of equity

d. Cost of debt

22. Regarding the trade-off theory, a firm would reach its optimal capital structure if

a. the tax savings from additional leverage are offset by the increased costs of distress.

b. the present value of the tax shield exceeds the value of the all-equity-financed firm

c. additional borrowing results in lower financial distress costs.

d. additional borrowing is offset by the interest tax shield.

Answer 1

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