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LOS k: Explain and diagram the static trade-off theory of the optimal capital structure.
Q1. Bhairavi Patel, an analyst for major brokerage firm, is considering how to incorporate the static trade-off capital structure theory into her valuation models for companies she covers. Patel is discussing the static trade-off theory with her colleagues, and makes the following statements:
Statement 1: If a firm maintains a high debt rating, the firm cannot be at its optimal capital structure based on the static trade-off theory.
Statement 2: The static theory implies that differences in the optimal capital structure across similar firms in different countries must be the result of different tax rates in those countries.
With respect to Patel’s statements:
A) both are correct.
B) only one is correct.
C) both are incorrect.
Q2. Katherine Epler, a self-employed corporate finance consultant, is working with another new client, Thurber Electronics. Epler is discussing the static trade-off capital structure theory with her client, and makes the following comments:
Comment 1: Under the static trade-off theory, the graph of a company’s weighted average cost of capital has a U shape.
Comment 2: According to the static trade-off theory, every firm will have the same optimal amount of debt that maximizes the value of the firm.
With respect to Epler’s comments:
A) only one is correct.
B) both are correct.
C) both are incorrect.
Q3. According to the static trade-off theory:
A) new debt financing is always preferable to new equity financing.
B) there is an optimal proportion of debt that will maximize the value of the firm.
C) the amount of debt used by a company should decrease as the company’s corporate tax rate increases.
Q4. Which of the following best describes the shape of the line depicting the value of a levered firm when plotted according to the static trade-off theory? Assume that the percentage of debt in the capital structure is the independent variable.
A) U shaped.
B) Upside down U shaped.
C) Always upward sloping.
Q5. Global Development expects to earn $6 million next year. 40% of this amount, or $2.4 million, has been allocated for distribution to common shareholders. There are 2.4 million shares outstanding, and the market price is $30 a share. If Global uses the $2.4 million to repurchase shares at the current price of $30 per share, its share price after the repurchase will be closest to:
A) $29.00.
B) $30.00.
C) $31.00. | 
发表于 2009-3-4 13:50
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