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WorksheetsCapital Structure
Total questions: 10
Worksheet time: 3mins
Which of the following statements regarding Modigliani and Miller’s Proposition I is most accurate?
A firm’s cost of equity financing increases as the proportion equity in a firm’s capital structure is increased
A firm’s cost of debt financing increases a firm’s financial leverage increases
A firm’s weighted average cost of capital is not affected by its choice of capital structure
A company is most likely to be financed only by equity during its:
start-up stage
growth stage
mature state
A company's optimal capital structure
maximizes firm value and minimizes the WACC
minimizes the interest rate on debt and maximizes expected earnings per share
maximizes expected earnings per share and maximizes the price per share of common stock
Which of the following is least likely an appropriate method for an analyst to estimate a firm’s target capital structure?
Use the firm’s current proportions of debt and equity based on market values, with an adjustment for recent trends in its capital structure
Use average capital structure weights for the firm’s industry, based on book values of debt and equity
Use the firm’s current capital structure, based on market values of debt and equity
Compared with managers who do not have significant compensation in the form of stock options, managers who have such compensation will be expected to favor:
less financial leverage
greater firm risk
issuance of common stock
According to Modigliani and Miller’s Proposition II without taxes:
the capital structure decision has no effect on the cost of equity
the investment and capital structure decisions are interdependent
the cost of equity increases as the use of debt in the capital structure increases
To determine their target capital structures in practice, it is least likely that firms will:
use the book value of their debt to make financing decisions
match the maturities of their debt issues to specific firm investment
determine an optimal capital structure based on the expected costs of financial distress
If investors have homogeneous expectations, the market is efficient, and there are no taxes, no transaction costs, and no bankruptcy costs, Modigliani and Miller’s Proposition I states that:
bankruptcy risk rises with more leverage
managers cannot change the value of the company by changing the amount of debt
managers cannot increase the value of the company by employing tax-saving strategies
The pecking order theory of financial structure decisions:
is based on information asymmetry
suggests that debt is the first choice for financing an investment of significant size
suggests that debt is the riskiest and least preferred source of financing
What is the value of the tax shield if the value of the firm is $5 million, its value if unlevered would be $4.78 million, and the present value of bankruptcy and agency costs is $360,000?
$540,000
$580,000
$600,000
