19/09/2015

CorporateFinance|MultipleChoiceQuiz

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CorporateFinance,3/e
StephenA.Ross,MassachusettsInstituteofTechnology
RandolphW.Westerfield,UniversityofSouthernCalifornia
JeffreyJaffe,UniversityofPennsylvania
GordonRoberts,YorkUniversity

CapitalStructure:BasicConcepts

MultipleChoiceQuiz
1

Anunleveredfirmisacompanythathas:
A) anequalamountofdebtandequityinthecapitalstructure.
B) moredebtthanequityinthecapitalstructure.
C) alldebtinthecapitalstructure.
D) allequityinthecapitalstructure.
E) noneoftheabove.

AnEPSEBIchartshowsthetradeoffbetweenfinancingplansand:
A) greaterriskassociatedwithdebtfinancingwhichis
evidencedbythegreaterslope.
B) theirbreakevenpoint.
C) theminimumearningsneedtopaythedebtfinancing.
D) alloftheabove.
E) noneoftheabove.

"Afirmcannotchangethetotalvalueofitsoutstandingsecuritiesby
changingitscapitalstructureproportions."Thisisastatement:
A) ofModiglianiMillerPropositionI.
B) oftheValueAdditivityPrinciple(VAP).
C) oftheSeparationTheorem.
D) oftheFirstPrincipleofValuation.
E) noneoftheabove.

Homemadeleverageisatermusedtodescribe:
A) afirmborrowingattheriskfreerate.
B) afirmskippingadividendpayment.
C) individualsborrowingontheirownaccounttobuysharesin
anunleveredfirm.
D) individualslendingontheirownaccounttosellsharesina
leveredfirm.
E) bothaandb.

Theeffectoffinancialleverageontheperformanceofthefirmdepends
on:
A) thefirm'slevelofEBIT.
B) therateofreturnonequity.
C) thecurrentmarketvalueofthedebt.
D) therateofdividendgrowth.

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CorporateFinance|MultipleChoiceQuiz

E) noneoftheabove.

MMPropositionIIstatesthat:
A) theexpectedreturnonequityispositivelyrelatedto
leverage.
B) therequiredreturnonequityisalinearfunctionofthe
firm'sdebttoequityratio.
C) therisktoequityincreaseswithleverage.
D) alloftheabove.
E) onlytwooftheabove.

Afirmhasadebttoequityratioof.50.Itscostofdebtis12%.Itsoverall
costofcapitalis14%.Whatisitscostofequityiftherearenotaxesor
otherimperfections?
A) 13%.
B) 16%.
C) 15%.
D) 18%.
E) Noneoftheabove.

Ifafirmisunleveredandhasacostofequitycapital9%whatwouldthe
costofequitybeifthefirmsbecameleveredat1.75?Theexpectedcostof
debtwouldbe7%.
A) 15.75
B) 16.0%.
C) 12.5%.
D) 14.5%.
E) Noneoftheabove.

Thepositivevaluetothefirmofaddingdebttothecapitalstructureinthe
presenceofcorporatetaxesis:
A) duetotheextracashflowgoingtotheinvestorsofthefirm
insteadofthetaxauthorities.
B) duetotheearningsbeforeinterestandtaxesbeingfully
taxedatthecorporaterate.
C) duetothegenerosityoftheshareholderstoprotectthe
interestsofthedebtholders.
D) becausepersonaltaxratesarethesameascorporatetax
rates.
E) becauseshareholdersprefertoletfinancialmanagers
choosethecapitalstructurethusmakingtheirvalue
independentofit.

10

Afirmhaszerodebtinitscapitalstructure.Itsoverallcostofcapitalis
8%.Thefirmisconsideringanewcapitalstructurewith50%debt.The
interestrateonthedebtwouldbe5%.Assumingthatthecorporatetax
rateis40%,itscostofequitycapitalwiththenewcapitalstructurewould
be?
A) 9.2%.
B) 9.8%.
C) 11%.
D) 8.9%.
E) Noneoftheabove.

11

Afirmhasadebttoequityratioof1.0.Ifithadnodebt,itscostofequity
wouldbe14%.Itscostofdebtis10%.Whatisitscostofequityifthe
corporatetaxrateis50%?
A) 18.0%.
B) 16.0%.

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CorporateFinance|MultipleChoiceQuiz

C) 14.0%.
D) 12.0%.
E) Noneoftheabove.
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