Question 1

According to MM's proposition II the expected return on equity is equal to the expected return on assets for a levered firm.

Accepted Answer

A) True 
 B)False

Question 2

A firm's capital structure is represented by its mix of:

Accepted Answer

A)  assets. 
B)  liabilities and equity. 
C)  assets and liabilities. 
D)  assets, liabilities, and equity. 
A)  assets. 
B)  liabilities and equity. 
C)  assets and liabilities. 
D)  assets, liabilities, and equity.

Question 3

Even after relaxing the MM assumption of no taxes,restructuring should not affect the value of the firm.

Accepted Answer

A) True 
 B)False

Question 4

Those who benefit from the interest tax shield are:

Accepted Answer

A)  debtholders. 
B)  equityholders. 
C)  both debtholders and equityholders. 
D)  only the firm's customers. 
A)  debtholders. 
B)  equityholders. 
C)  both debtholders and equityholders. 
D)  only the firm's customers.

Question 5

A firm's business risk depends upon:

Accepted Answer

A)  its use of debt in the capital structure. 
B)  the risk of the firm's assets and operations. 
C)  the types of debt financing utilized. 
D)  the costs of financial distress. 
A)  its use of debt in the capital structure. 
B)  the risk of the firm's assets and operations. 
C)  the types of debt financing utilized. 
D)  the costs of financial distress.

Question 6

According to MM,debt restructuring will not change the firm's overall value.

Accepted Answer

A) True 
 B)False

Question 7

Management's perceived signals to investors form an important component of pecking-order theory.

Accepted Answer

A) True 
 B)False

Question 8

At some debt-equity ratio,the costs of financial distress are expected to overcome the value of the extra interest tax shield for a firm.

Accepted Answer

A) True 
 B)False

Question 9

Costs of financial distress are costs arising from bankruptcy or distorted business decisions before bankruptcy.

Accepted Answer

A) True 
 B)False

Question 10

Which one of these statements corresponds to MM proposition I without taxes?

Accepted Answer

A)  Debt interest has no effect on either equity income or firm value. 
B)  Debt interest reduces equity income and increases firm value. 
C)  Debt interest reduces equity income but does not affect firm value. 
D)  The value of a firm increases as its debt-equity ratio increases. 
A)  Debt interest has no effect on either equity income or firm value. 
B)  Debt interest reduces equity income and increases firm value. 
C)  Debt interest reduces equity income but does not affect firm value. 
D)  The value of a firm increases as its debt-equity ratio increases.

Question 11

If a firm's expected return on equity equals its expected return on assets,then the:

Accepted Answer

A)  expected return on debt exceeds the expected return on assets. 
B)  likelihood of financial distress is high. 
C)  firm has too much debt. 
D)  firm has no debt in its capital structure. 
A)  expected return on debt exceeds the expected return on assets. 
B)  likelihood of financial distress is high. 
C)  firm has too much debt. 
D)  firm has no debt in its capital structure.

Question 12

The interest tax shield is equal to the:

Accepted Answer

A)  difference between the interest expense and income taxes. 
B)  amount of interest paid in a given year. 
C)  product of the interest expense and the tax rate. 
D)  product of the debt principal and the interest rate on debt. 
A)  difference between the interest expense and income taxes. 
B)  amount of interest paid in a given year. 
C)  product of the interest expense and the tax rate. 
D)  product of the debt principal and the interest rate on debt.

Question 13

Which one of these is not an underlying assumption of MM Proposition I?

Accepted Answer

A)  Capital markets function well. 
B)  Investors can borrow or lend on the same terms as firms. 
C)  Taxes remain at their current non-zero levels. 
D)  Securities are fairly priced. 
A)  Capital markets function well. 
B)  Investors can borrow or lend on the same terms as firms. 
C)  Taxes remain at their current non-zero levels. 
D)  Securities are fairly priced.

Question 14

As the debt-equity ratio decreases when debt is not risk free:

Accepted Answer

A)  debtholders require a higher expected return. 
B)  debtholders require a lower expected return. 
C)  the expected return on equity increases. 
D)  the expected return on assets increases. 
A)  debtholders require a higher expected return. 
B)  debtholders require a lower expected return. 
C)  the expected return on equity increases. 
D)  the expected return on assets increases.

Question 15

A firm is expected to generate $1.5 million in operating income and pay $250,000 in interest.Ignoring taxes,this will generate $12.50 earnings per share.What will happen to EPS if operating income increases by 33.3% to $2.0 million?

Accepted Answer

A)  EPS increases by 25% to $15.63. 
B)  EPS increases by 33.3% to $16.67. 
C)  EPS increases by 40% to $17.50. 
D)  EPS increases by 60% to $20.00. 
A)  EPS increases by 25% to $15.63. 
B)  EPS increases by 33.3% to $16.67. 
C)  EPS increases by 40% to $17.50. 
D)  EPS increases by 60% to $20.00.

Question 16

Which of the following pair of firms do you think should be more highly levered: A retailing firm with prime downtown real estate,or a social media company whose major assets are its unique software and client loyalty?

Accepted Answer

The retail

Question 17

Financial risk is the risk to shareholders that results from debt financing.

Accepted Answer

A) True 
 B)False

Question 18

Which one of these is a disadvantage to tax-paying individual investors?

Accepted Answer

A)  Receiving interest income rather than dividends 
B)  Receiving capital gains rather than dividends 
C)  Receiving capital gains rather than interest income 
D)  Receiving dividends rather than interest income 
A)  Receiving interest income rather than dividends 
B)  Receiving capital gains rather than dividends 
C)  Receiving capital gains rather than interest income 
D)  Receiving dividends rather than interest income

Question 19

MM's proposition I,or the debt-irrelevance proposition,states that the value of a firm is unaffected by its capital structure.

Accepted Answer

A) True 
 B)False

Question 20

Firms are more likely to restrict borrowing if the:

Accepted Answer

A)  return on the financed project is too high. 
B)  firm's asset base is largely intangible. 
C)  firm's asset beta is zero. 
D)  increased debt decreases the firm's WACC. 
A)  return on the financed project is too high. 
B)  firm's asset base is largely intangible. 
C)  firm's asset beta is zero. 
D)  increased debt decreases the firm's WACC.

Exam 16: Debt Policy

According to MM's proposition II the expected return on equity is equal to the expected return on assets for a levered firm.

A firm's capital structure is represented by its mix of:

Even after relaxing the MM assumption of no taxes,restructuring should not affect the value of the firm.

Those who benefit from the interest tax shield are:

A firm's business risk depends upon:

According to MM,debt restructuring will not change the firm's overall value.

Management's perceived signals to investors form an important component of pecking-order theory.

At some debt-equity ratio,the costs of financial distress are expected to overcome the value of the extra interest tax shield for a firm.

Costs of financial distress are costs arising from bankruptcy or distorted business decisions before bankruptcy.

Which one of these statements corresponds to MM proposition I without taxes?

If a firm's expected return on equity equals its expected return on assets,then the:

The interest tax shield is equal to the:

Which one of these is not an underlying assumption of MM Proposition I?

As the debt-equity ratio decreases when debt is not risk free:

A firm is expected to generate $1.5 million in operating income and pay $250,000 in interest.Ignoring taxes,this will generate $12.50 earnings per share.What will happen to EPS if operating income increases by 33.3% to $2.0 million?

Which of the following pair of firms do you think should be more highly levered: A retailing firm with prime downtown real estate,or a social media company whose major assets are its unique software and client loyalty?

Financial risk is the risk to shareholders that results from debt financing.

Which one of these is a disadvantage to tax-paying individual investors?

MM's proposition I,or the debt-irrelevance proposition,states that the value of a firm is unaffected by its capital structure.

Firms are more likely to restrict borrowing if the:

Goals and Governance of the Firm

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Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

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Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

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Introduction to Corporate Financing and Governance

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