Question 1

A firm requires an investment of $60,000 and borrows $20,000 at 8%. If the return on equity is 14% and the tax rate is 30%, what is the firm's WACC?

Accepted Answer

A) 11.2% 
B) 9.0% 
C) 13.4% 
D) 22.4% 
A) 11.2% 
B) 9.0% 
C) 13.4% 
D) 22.4%

Question 2

Managers should consider ________ for external financing when agency costs are significant.

Accepted Answer

A) long-term debt 
B) retained earnings 
C) internal equity 
D) short-term debt 
A) long-term debt 
B) retained earnings 
C) internal equity 
D) short-term debt

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) The Law of One Price implies that leverage will affect the total value of a firm under perfect capital market conditions. 
B) In the absence of taxes or other transaction costs, the total cash flow paid out to all of a firm's security holders is equal to the total cash flow generated by the firm's assets. 
C) With perfect capital markets, leverage merely changes the allocation of cash flows between debt and equity, without altering the total cash flows of a firm. 
D) In a perfect capital market, the total value of a firm is equal to the market value of the total cash flows generated by its assets and is not affected by its choice of capital structure. 
A) The Law of One Price implies that leverage will affect the total value of a firm under perfect capital market conditions. 
B) In the absence of taxes or other transaction costs, the total cash flow paid out to all of a firm's security holders is equal to the total cash flow generated by the firm's assets. 
C) With perfect capital markets, leverage merely changes the allocation of cash flows between debt and equity, without altering the total cash flows of a firm. 
D) In a perfect capital market, the total value of a firm is equal to the market value of the total cash flows generated by its assets and is not affected by its choice of capital structure.

Question 4

Which of the following statements is FALSE assuming a perfect market?

Accepted Answer

A) The unlevered beta measures the market risk of a firm's business activities, ignoring any additional risk due to leverage. 
B) If a firm holds $1 in cash and has $1 of risk-free debt, then the interest earned on the cash will equal the interest paid on the debt. The cash flows from each source cancel each other, just as if the firm held no cash and no debt. 
C) The unlevered beta measures the market risk of a firm without leverage, which is equivalent to the beta of the firm's assets. 
D) As the amount of debt decreases, the debt becomes riskier because there is a chance the firm will default. 
A) The unlevered beta measures the market risk of a firm's business activities, ignoring any additional risk due to leverage. 
B) If a firm holds $1 in cash and has $1 of risk-free debt, then the interest earned on the cash will equal the interest paid on the debt. The cash flows from each source cancel each other, just as if the firm held no cash and no debt. 
C) The unlevered beta measures the market risk of a firm without leverage, which is equivalent to the beta of the firm's assets. 
D) As the amount of debt decreases, the debt becomes riskier because there is a chance the firm will default.

Question 5

A firm requires an investment of $25,000 and will return $36,500 after 1 year. If the firm borrows $20,000 at 7%, what is the return on levered equity?

Accepted Answer

A) 162% 
B) 202% 
C) 242% 
D) 283% 
A) 162% 
B) 202% 
C) 242% 
D) 283%

Question 6

Which of the following statements is TRUE?

Accepted Answer

A) Holding cash has the opposite effect of leverage on risk and return. 
B) We use the market value of a firm's net debt when computing its WACC and unlevered beta to measure the cost of capital and market risk of the firm's business assets. 
C) Since the WACC does not change with the use of leverage, the value of a firm's free cash flow evaluated using the WACC does not change, and so the enterprise value of the firm does not depend on its financing choices. 
D) Even if a firm's capital structure is more complex, the WACC is calculated by computing the weighted average cost of only the firm's debt and equity. 
A) Holding cash has the opposite effect of leverage on risk and return. 
B) We use the market value of a firm's net debt when computing its WACC and unlevered beta to measure the cost of capital and market risk of the firm's business assets. 
C) Since the WACC does not change with the use of leverage, the value of a firm's free cash flow evaluated using the WACC does not change, and so the enterprise value of the firm does not depend on its financing choices. 
D) Even if a firm's capital structure is more complex, the WACC is calculated by computing the weighted average cost of only the firm's debt and equity.

Question 7

Which of the following statements is FALSE?

Accepted Answer

A) With no debt, the WACC is equal to the unlevered equity cost of capital. 
B) With perfect capital markets, a firm's WACC is dependent on its capital structure and is equal to its equity cost of capital only if the firm is unlevered. 
C) As the firm borrows at the low cost of capital for debt, its equity cost of capital rises, but the net effect is that the firm's WACC is unchanged. 
D) As debt has a lower cost of capital than equity, higher leverage lowers a firm's WACC. 
A) With no debt, the WACC is equal to the unlevered equity cost of capital. 
B) With perfect capital markets, a firm's WACC is dependent on its capital structure and is equal to its equity cost of capital only if the firm is unlevered. 
C) As the firm borrows at the low cost of capital for debt, its equity cost of capital rises, but the net effect is that the firm's WACC is unchanged. 
D) As debt has a lower cost of capital than equity, higher leverage lowers a firm's WACC.

Question 8

A firm that does not have trouble meeting its debt obligations is said to be in financial distress.

Accepted Answer

A) True 
 B)False

Question 9

MM Proposition I states that in a perfect capital market the total value of a firm is equal to the market value of the ________ generated by its assets.

Accepted Answer

A) earnings after taxes 
B) earnings after interest 
C) cash flows after taxes 
D) free cash flows 
A) earnings after taxes 
B) earnings after interest 
C) cash flows after taxes 
D) free cash flows

A firm requires an investment of $60,000 and borrows $20,000 at 8%. If the return on equity is 14% and the tax rate is 30%, what is the firm's WACC?

Managers should consider ________ for external financing when agency costs are significant.

Which of the following statements is FALSE?

Which of the following statements is FALSE assuming a perfect market?

A firm requires an investment of $25,000 and will return $36,500 after 1 year. If the firm borrows $20,000 at 7%, what is the return on levered equity?

Which of the following statements is TRUE?

Which of the following statements is FALSE?

A firm that does not have trouble meeting its debt obligations is said to be in financial distress.

MM Proposition I states that in a perfect capital market the total value of a firm is equal to the market value of the ________ generated by its assets.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters

Exam 16: Capital Structure

A firm requires an investment of $60,000 and borrows $20,000 at 8%. If the return on equity is 14% and the tax rate is 30%, what is the firm's WACC?

Managers should consider ________ for external financing when agency costs are significant.

Which of the following statements is FALSE?

Which of the following statements is FALSE assuming a perfect market?

A firm requires an investment of $25,000 and will return $36,500 after 1 year. If the firm borrows $20,000 at 7%, what is the return on levered equity?

Which of the following statements is TRUE?

Which of the following statements is FALSE?

A firm that does not have trouble meeting its debt obligations is said to be in financial distress.

MM Proposition I states that in a perfect capital market the total value of a firm is equal to the market value of the ________ generated by its assets.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters