Q3 Special Topics in Finance

The capital structure decision does not affect financial risk and, hence, the value of the company

• True

• False

The weighted average cost of capital (WACC) is the marginal cost of raising additional capital and is affected by the costs of capital and the proportion of each source of capital

• True

• False

The market valie of a company is not affected by the capital structure of the company

• True

• False

Based on the assumptions that there are no taxes, costs of financial distress, or agency costs, so investors would value firma with the same cash flows as the same, regardless of how the firms are financed

• True

• False

The cost of equity is a linear function of the company's debt/equity ratio

• True

• False

Because creditors have a claim to income and assets that has preference over equity, the cost of debt will be more than the cost of equity

• True

• False

The WACC is constant because as more of the cheaper source of capital is used (that is, debt), the cost of equity increases

• True

• False

Costs of financial distress are costs associated with a company that is having easy meeting its obligations

• True

• False

There is an optimal capital structure at which the value of the firm is maximized, and the cost of capital is minimized

• True

• False

Agency costs are the costs associated with the seperation of owners and management

• True

• False