Corporate Finance2

Capital structure of the firm can be defined as

• The firm's mix of debt, equity, and other securities

• The firm's debt-equity ratio

• The market imperfection that the firm's manager can exploit

• All of these options

Modigliani and Miller's Proposition I states that

• The market value of a firm's common stock is independent of its capital structure

• The market value of a firm's debt is independent of its capital structure

• The market value of any firm is independent of its capital structure

• None of these options

For an all-equity firm with no taxes

• As earnings before interest and taxes (EBIT) increases, the earnings per share (EPS) increases by the same percent

• As EBIT increases, the EPS increases by a larger percent

• As EBIT increases, the EPS decreases

• None of these options

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?

• 20%

• 28%

• 30%

• 32%

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?

• 15%

• 18%

• 16%

• 13%

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.)

• 8%

• 10%

• 13%

• 15%

Under MM theory, when a firm changes its mix of debt and equity, _____ and ____ change, while _____ does not.

• Debts and assets change; rate of return does not

• Cost of capital and expected returns change; risk does not

• Risk and expected returns change; cost of capital does not

• Debt and equity change; risk does not

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.)

• 5.0%

• 8.5%

• 9.2%

• 17%

If a firm permanently borrows $20 million at an interest rate of 8%, what is the present value of the interest tax shield? Assume a 35% tax rate.

• $7.00 million

• $8.75 million

• $16.50 million

• $25.00 million

Which theory implies that highly profitable companies will have lower debt ratios?

• Trade-off theory

• Pecking-order theory

• MM theory without taxes

• Market timing theory