Finance - Chapter 16

Front 1

Capital restructuring involves changing the amount of ____ a firm has without changing the firm's ____

Back 1

leverage; assets

Front 2

The firm can increase leverage by issuing ____ and repurchasing ____ ____

Back 2

debt; outstanding shares

Front 3

The firm can decrease leverage by issuing ___ ____ and retiring ____ ____

Back 3

new shares; outstanding debt

Front 4

The primary goal of financial managers

Back 4

Maximize stockholder wealth

Front 5

We can maximize stockholder wealth by maximizing the ____ of the firm or minimizing the ____

Back 5

value; WACC

Front 6

When we increase the amount of ____ ____, we increase the ____ ____ ____

Back 6

debt financing; fixed interest expense

Front 7

If we have a good year, then we pay our ____ ____ and we have more left over for our stockholders

Back 7

fixed cost

Front 8

____ amplifies the variation in both EPS and ROE

Back 8

leverage

Front 9

Current: ROE ranges from 6% to 20%
Proposed: ROE ranges from 2% to 30%

Back 9

variability in ROE

Front 10

Current: EPS ranges from $0.60 to $2.00
Proposed: EPS ranges from $0.20 to $3.00

Back 10

variability in EPS

Front 11

The variability in both ROE and EPS ____ when financial leverage is increased

Back 11

increases

Front 12

If we expect EBIT to be greater than the break-even point, then leverage may be _____ to our stockholders

Back 12

beneficial

Front 13

If we expect EBIT to be less than the break-even point, then leverage is _____ to our stockholders

Back 13

detrimental

Front 14

When an investor can change the overall amount of financial leverage to which they are exposed

Back 14

homemade leverage

Front 15

Investor can increase financial leverage themselves to create different patter of payoffs

Back 15

homemade leverage

Front 16

- buy debt of the firm
- borrow money to buy more stock

Back 16

methods of homemade leverage

Front 17

Given potential for homemade leverage, choice of ____ ____ becomes irrelevant

Back 17

capital structure

Front 18

Proposition I: firm value is independent of capital structure

Back 18

Modigliani and Miller Theory of Capital Structure

Front 19

Proposition II: Cost of Equity is a function of 3 things:
- required return on firm's assets
- cost of debt
- debt to equity ratio

Back 19

Modigliani and Miller Theory of Capital Structure

Front 20

M&M Theory: the value of the firm is determined by the ___ ___ to the firm and the ___ of the ___

Back 20

cash flows; risk; assets

Front 21

M&M Theory: ___ is not affected by capital structure (proposition II)

Back 21

WACC

Front 22

Proposition I: the ____ ____ of the firm do not change; therefore, value doesn't change

Back 22

cash flows

Front 23

Ra represents...

Back 23

the cost of the firm's business risk

Front 24

the cost of the firm's financial risk, or the additional return required by stockholders to compensate for the risk of leverage

Back 24

represented by (Ra - Rd)/(D/E)

Front 25

Offsets/compensates for changes in capital structure

Back 25

(Ra - Rd)/(D/E)

Front 26

As D/E ratio increases, if WACC stays the same cost of equity ____

Back 26

increases

Front 27

As risk to firm increases, cost of equity ____ to the point where everything else stays the same

Back 27

increases

Front 28

The tax benefit is only important if the firm has a large ___ ___

Back 28

tax liability

Front 29

The greater the risk of financial distress, the ___ ___ will be optimal for the firm

Back 29

less debt

Front 30

The cost of financial distress ____ across firms and industries, and as a manager you need to understand the ____ of your industry

Back 30

varies; cost

Front 31

marketed claims + nonmarketed claims

Back 31

value of the firm

Front 32

The claims of stockholders and bondholders

Back 32

marketed claims

Front 33

The claims of the government and other nonpotential stakeholders

Back 33

nonmarketed claims

Front 34

The overall value of the firm is unaffected by changes in ____ ____

Back 34

capital structure

Front 35

The division of value between marketed claims and nonmarketed claims may be impacted by ____ ____ ____

Back 35

capital structure decisions

Front 36

The pie model shoes that the value of all claim against the firm's cash flows is not affected by ____ ____, but the ____ values of claims change as the amount of debt financing is _____

Back 36

capital structure; relative; increased

Front 37

Theory stating that firms prefer to issue debt rather than equity if internal financing is insufficient

Back 37

Pecking-Order Theory

Front 38

Rule 1: Use internal financing debt
Rule 2: Issue debt next, new equity last

Back 38

rules of Pecking-Order Theory

Front 39

- Should managers borrow from creditors and issue a large one-time dividend to shareholders?
- How might creditors control this potential transfer wealth?

Back 39

ethics issues