Reading 29: Capital Structure and Leverage LOS m～ Q1-3

structure, following, management, actual, capital

LOS m: Explain the target capital structure and why actual capital structure may fluctuate around the target.

Q1. Zoltan DeJainus is the Chief Financial Officer of Hilliard Veterinary Products (HVP). In a discussion with HVP’s management team about the firm’s capital structure, DeJainus makes the following comments:

Comment 1: HVP’s target capital structure is the same as its optimal capital structure.

Comment 2: If market value fluctuations cause the firm’s actual capital structure to vary from the target capital structure, HVP should buy or sell its own stock or bonds as necessary to make sure that the capital structure remains at its optimal level.

Should the members of HVP’s management team agree or disagree with each of DeJainus’ comments?

A) Agree with only one.

B) Agree with both.

C) Disagree with both.

Q2. Katherine Epler, a self-employed corporate finance consultant, is conducting a seminar for executive management teams regarding issues related to a company’s capital structure. In the morning session of the seminar, Epler makes the following two statements:

Statement 1: Management teams will have a target capital structure for their firm because of an awareness of how competing firms finance their operations and a desire to keep their financial ratios close to industry averages.

Statement 2: In order to reap the benefits that come with having a target capital structure, management must always raise capital in the exact proportions called for by the target.

With respect to Epler's statements:

A) both are correct.

B) only one is correct.

C) both are incorrect.

Q3. Which of the following is least likely to be a reason why a firm’s actual capital structure may vary from the target capital structure?

A) The firm decides to issue additional equity because management believes the firm’s stock is overpriced.

B) The firm decides to finance a low risk project with 100% debt to improve the project’s profitability.

C) The firm decides to issue additional debt due to a temporary discount in underwriting fees for corporate debt.

[此贴子已经被作者于2009-3-4 14:10:30编辑过]