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WorksheetsCorporate Finance2
Total questions: 10
Worksheet time: 7mins
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
