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| 1 | |
Capital structure of the firm can be defined as: |
| | A) | The firm's mix of debt, equity, and other securities |
| | B) | The firm's debt-equity ratio |
| | C) | The market imperfection that the firm's manager can exploit |
| | D) | All of these options |
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| 2 | |
Modigliani and Miller's Proposition I states that: |
| | A) | The market value of a firm's common stock is independent of its capital structure |
| | B) | The market value of a firm's debt is independent of its capital structure |
| | C) | The market value of any firm is independent of its capital structure |
| | D) | None of these options |
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| 3 | |
The law of conservation of value implies that: |
| | A) | The mix of senior and subordinated debt does not affect the value of the firm |
| | B) | The mix of convertible and non-convertible debt does not affect the value of the firm |
| | C) | The mix of common stock and preferred stock does not affect the value of the firm |
| | D) | All of these options |
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| 4 | |
For an all-equity firm with no taxes, |
| | A) | As earnings before interest and taxes (EBIT) increases, the earnings per share (EPS) increases by the same percent |
| | B) | As EBIT increases, the EPS increases by a larger percent |
| | C) | As EBIT increases, the EPS decreases |
| | D) | None of these options |
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| 5 | |
When comparing levered vs. unlevered capital structures, leverage works to increase EPS for high levels of operating income because: |
| | A) | Interest payments on the debt vary with EBIT levels |
| | B) | Interest payments on the debt stay fixed leaving less income to be distributed over fewer shares |
| | C) | Interest payments on the debt stay fixed, leaving more income to be distributed over less shares |
| | D) | Interest payments on the debt stay fixed, leaving less income to be distributed over more shares |
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| 6 | |
Earn and Learn Company is financed entirely by common stock which is priced to offer a 20% expected return. If the company repurchases 50% of the stock and substitutes an equal value of debt yielding 8%, what is the expected return on the common stock after refinancing? |
| | A) | 20% |
| | B) | 28% |
| | C) | 32% |
| | D) | 30% |
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| 7 | |
The weighted average cost of capital (WACC) in a tax-free world is given by: |
| | A) | rD(1 − TC) (D/V) + rE(E/V) |
| | B) | [rD(D/V) + rE(E/V)]/rF |
| | C) | [rD(D/V) + rE(E/V)]/(1 − TC) |
| | D) | rD(D/V) + rE(E/V) |
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| 8 | |
A firm has a debt-to-equity ratio of 0.50. Its cost of debt is 12%. Its overall cost of capital is 16%. What is its cost of equity if there are no taxes? |
| | A) | 13% |
| | B) | 16% |
| | C) | 15% |
| | D) | 18% |
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| 9 | |
The beta of an all-equity firm is 1.2. If the firm changes its capital structure to 50% debt and 50% equity using 8% debt financing, what will be the beta of the levered firm? The beta of debt is 0.2. (Assume no taxes.) |
| | A) | 1.2 |
| | B) | 2.4 |
| | C) | 2.2 |
| | D) | 1.8 |
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| 10 | |
The Seifert Company is financed by $2 million (market value) in debt and $3 million (market value) in equity. The cost of debt is 10% and the cost of equity is 15%. Calculate the weighted average cost of capital. (Assume no taxes.) |
| | A) | 10% |
| | B) | 15% |
| | C) | 13% |
| | D) | 8% |
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| 11 | |
Minimizing the weighted average cost of capital is the same as: |
| | A) | Maximizing the market value of the firm |
| | B) | Maximizing the market value of the firm only if MM's Proposition I holds |
| | C) | Maximizing the profits of the firm |
| | D) | None of these options |
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| 12 | |
Which of the following cases would lead to firm value depending on financing? |
| | A) | A company that borrows money more cheaply than an individual |
| | B) | A positive NPV capital budgeting project |
| | C) | An unsatisfied clientele |
| | D) | Minimizing the cost of capital |
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| 13 | |
When a firm changes its mix of debt and equity, _____ and ____ change, while _____ does not. |
| | A) | Debts and assets change; rate of return does not |
| | B) | Cost of capital and expected returns change; risk does not |
| | C) | Risk and expected returns change; cost of capital does not |
| | D) | None of these options |
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| 14 | |
The use of debt to increase the expected return on equity describes the firm utilizing |
| | A) | Financial leverage |
| | B) | Generally accepted accounting practices |
| | C) | Sound investment strategies |
| | D) | A method to avoid bankruptcy |
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| 15 | |
The M&M Company is financed by $10 million (market value) in debt and $15 million (market value) in equity. The cost of debt is 5% and the cost of equity is 12%. Calculate the weighted average cost of capital. (Assume no taxes.) |
| | A) | 5.00% |
| | B) | 8.50% |
| | C) | 9.20% |
| | D) | 17.00% |
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