Fundamentals of Corporate Finance (2015), 3e (Berk/DeMarzo/Harford) test bank.

Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)
Chapter 16 Capital Structure

16.1 Capital Structure Choices

1) Financial managers prefer to choose the same debt level no matter which industry they
operate in.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition

2) Even if two firms operate in the same industry, they may prefer different choices of debt-
equity ratios.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition

3) Equity in a firm with no debt is called unlevered equity.
Answer: TRUE
Diff: 1 Var: 1
Skill: Definition
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition

4) The relative proportions of debt, equity, and other securities that a firm has outstanding
constitute its ________.
A) capital structure
B) dividend expense
C) retained earnings
D) paid out capital
Answer: A
Diff: 1 Var: 1
Skill: Definition
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition




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,5) A firm's ________ ratio is the fraction of the firm's total value that corresponds to debt.
A) debt-to-equity
B) equity-to-debt
C) debt-to-value
D) liability
Answer: C
Diff: 1 Var: 1
Skill: Definition
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition

6) Which of the following statements is FALSE?
A) The relative proportions of debt, equity, and other securities that a firm has outstanding
constitute its capital structure.
B) The most common choices are financing through equity alone and financing through a
combination of debt and equity.
C) A project's net present value (NPV) represents the value to the new investors of a firm
created by the project.
D) When corporations raise funds from outside investors, they must choose which type of
security to issue.
Answer: C
Explanation: C) A project's NPV represents the value to the existing shareholders of a firm
created by the project.
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition

7) Equity in a firm with debt is called ________.
A) levered equity
B) risk-free equity
C) unlevered equity
D) preferred equity
Answer: A
Diff: 1 Var: 1
Skill: Definition
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition




2
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,8) Equity in a firm with no debt is called ________.
A) levered equity
B) unlevered equity
C) risk-free equity
D) preferred equity
Answer: B
Diff: 1 Var: 1
Skill: Definition
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition

9) Which of the following does a firm consider in the choice of securities issued?
A) the tax consequences of the chosen security
B) the transactions costs of the chosen security
C) whether the chosen security will have a fair price in the market
D) All of the above are considered.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition

10) What role do industries play in the capital structure choice for a firm?
Answer: Industries are found to have distinct patterns in their capital structures. For
example, software companies such as Microsoft are far less levered than are automobile
manufacturers such as Ford Motor Company.
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: SS
Question Status: Revised

11) What is the capital structure of a firm?
Answer: The relative proportion of debt and equity used by a firm is called its capital
structure.
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition




3
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, 12) What considerations should managers have while deciding on firms' capital structure?
Answer: Managers should first take a look at the industry norm for the firm. Subsequently,
they should consider if the securities issued will receive fair price in the market, have tax
consequences, entail transaction costs, or require a change to future investment
opportunities.
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: SS
Question Status: Revised

16.2 Capital Structure in Perfect Capital Markets

1) According to researchers Modigliani and Miller, with perfect capital markets, the total
value of a firm should not depend on its capital structure.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition

2) With perfect capital markets, because different choices of capital structure offer a
benefit to investors, the capital structure affects the value of a firm.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised

3) A financial manager makes a choice of the amount and source of capital based on how
the choice will impact the ________.
A) revenue
B) face value of bonds
C) depreciation
D) firm value
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised




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