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1 | | According to the trade-off theory, the driving considerations behind managers’ decisions on capital structure are |
| | A) | Market timing |
| | B) | Taxes and costs of financial distress |
| | C) | Share dilution |
| | D) | Asymmetric information |
| | E) | None of the above |
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2 | | The major difference between the traditional and behavioral theories of capital structure is that |
| | A) | The behavioral theory focuses on market timing by managers |
| | B) | The traditional theory focuses on managerial needs for financial flexibility |
| | C) | Behavioral theories assume managers are always over-optimistic |
| | D) | There is no major difference between them in practice - both lead to similar conclusions on capital structure |
| | E) | None of the above |
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3 | | According to surveys of managers, the number one consideration for equity issuance is |
| | A) | Taxes |
| | B) | Asymmetric information |
| | C) | Financial slack |
| | D) | Avoiding earnings dilution |
| | E) | All of the above. |
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4 | | According to surveys of managers, the number one consideration for debt issuance is |
| | A) | Increasing the value of the tax shield |
| | B) | Asymmetric information |
| | C) | Having enough internal funds to pursue new projects when they arrive |
| | D) | Avoiding earnings dilution |
| | E) | All of the above |
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5 | | Empirical evidence on capital structure inconsistent with the pecking order theory shows that |
| | A) | Managers do not exhaust their cash reserves before taking on debt |
| | B) | Survey evidence shows that managers believe that the source of their firm under-valuation is information asymmetry |
| | C) | Managers believe their firms are always undervalued |
| | D) | All of the above |
| | E) | There is little evidence against the pecking order theory. |
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6 | | Examples of sensitivity of investment to cash flow include |
| | A) | When firms receive more cash or take on less debt, they invest more |
| | B) | When firms receive large unexpected windfalls from unrelated business, they tend to make more acquisitions |
| | C) | When their capital positions are impaired, reinsurance companies issue less earthquake insurance |
| | D) | When cash flow in one division of a multi-divisional firm increases, all other divisions invest more |
| | E) | All of the above |
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7 | | A firm with limited cash and debt capacity, choosing between repurchasing its own shares and investing in a project |
| | A) | Should always invest in the project |
| | B) | Should always repurchase its own shares |
| | C) | Should compare the NPV of the two strategies, treating them as alternatives |
| | D) | Should try to issue more debt to raise cash |
| | E) | Both c and d |
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8 | | According to survey evidence, managers typically |
| | A) | First decide their investment plans and then decide how much to repurchase |
| | B) | First decide how much capital to raise and then decide investment plans |
| | C) | Decide repurchase and investment plans at the same time |
| | D) | First decide how much to repurchase and then decide their investment plans. |
| | E) | None of the above |
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9 | | Managers who are excessively optimistic |
| | A) | Tend to hold their stock options until close to expiration |
| | B) | Tend to be underdiversified, holding most of their assets in the firm |
| | C) | Tend to be cited in the popular press as optimistic or confident |
| | D) | All of the above |
| | E) | On average, managers tend to be realists |
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10 | | Excessively optimistic, overconfident managers of firms with little cash tend to |
| | A) | Make acquisitions with shares because they over-value the equity in their firms |
| | B) | Pass up positive NPV projects because they over-value the equity in their firms |
| | C) | Try to issue shares on the open market to get cash, since they believe their shares are a good deal |
| | D) | Adopt negative NPV projects because they overvalue the cash flows from those projects |
| | E) | None of the above |
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