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    MM Proposition MCQ

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    MM Fakhrul Islam
    The document contains a multiple choice quiz on capital structure concepts from corporate finance. It has 11 questions testing understanding of terms like unlevered firms, the tradeoff in an EPS-EBI chart, Modigliani-Miller propositions, and the impact of leverage, taxes and capital structure on costs of equity and capital.

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    MM Proposition MCQ

    Uploaded by

    MM Fakhrul Islam
    854 views3 pages
    The document contains a multiple choice quiz on capital structure concepts from corporate finance. It has 11 questions testing understanding of terms like unlevered firms, the tradeoff in an EPS-EBI chart, Modigliani-Miller propositions, and the impact of leverage, taxes and capital structure on costs of equity and capital.

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    MM Proposition MCQ

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    The document contains a multiple choice quiz on capital structure concepts from corporate finance. It has 11 questions testing understanding of terms like unlevered firms, the tradeoff in an EPS-EBI chart, Modigliani-Miller propositions, and the impact of leverage, taxes and capital structure on costs of equity and capital.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    854 views3 pages

    MM Proposition MCQ

    Uploaded by

    MM Fakhrul Islam
    The document contains a multiple choice quiz on capital structure concepts from corporate finance. It has 11 questions testing understanding of terms like unlevered firms, the tradeoff in an EPS-EBI chart, Modigliani-Miller propositions, and the impact of leverage, taxes and capital structure on costs of equity and capital.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    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.
    SubmitAnswers

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