Chapter 12 Determining the Financing Mix

5) Financial structure includes long- and short-term sources of funds.

6) According to the moderate view of capital structure theory, the cost of common equity is constant regardless of the debt financing level.

7) The objective of capital structure management is to maximize the market value of the firm's common stock.

8) The independence hypothesis suggests that the total market value of the firm's outstanding securities is unaffected by its capital structure.

9) The moderate view of capital structure theory allows for the tax-deductibility of interest expense.

10) Other things the same, the use of debt financing reduces the firm's total tax bill resulting in a higher total market value.

11) The tax shield on interest is calculated by multiplying the interest rate paid on debt by the principal amount of the debt and the firm's marginal tax rate.

12) A firm's cost of capital is not affected by the composition of the right-hand side of the firm's balance sheet, but rather is determined by the firm's mix of assets.

13) Financial structure is another term for capital structure.

14) Financial structure is equal to non-interest bearing liabilities, such as accounts payable and accruals, plus capital structure, which includes short- and long-term debt, preferred stock, and common equity.