A…Which of these represent a payment of a nonmarketed claim on a firm’s cash flows? I. Payment of a customer’s liability claim. II. Principal repayment of a bond. III. Federal corporate tax payment. IV. Dividend payment.
B….Which of these represent indirect costs of financial distress? I. Court fees paid to a bankruptcy court, II. A firm’s supplier requiring payment in cash rather than offering its normal credit terms, III. Cost of a manager’s time spent renegotiating the terms of a debt to avoid bankruptcy, IV. Loss of a key employee concerned about job security and the future of the firm
C….Which of these will occur in a world with taxes and financial distress when a firm is operating at its optimal capital structure? I. The debt-to-equity ratio will be optimal. II. The weighted average cost of capital will be at its minimal point. III. The required return on assets will be at its maximum point. IV. The increased benefit from additional debt will equal the increased bankruptcy costs of that debt.
NOTE – answers may be a combination of the choices (i.e. I and II, or II, and III and IV)