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WorksheetsCIC2011 WEEK 6 QUIZ
Total questions: 15
Worksheet time: 8mins
Which of the following is NOT a benefit of debt financing?
Tax shields
Limited liability
Finanical flexibility
Increased leverage
A firm's cost of equity is:
The rate of return that investors require for investing in the firm's equity
The rate of interest that the firm must pay on its debt.
The average weighted cost of capital for the firm.
The sum of the firm's cost of debt and cost of equity.
A firm's weighted average cost of capital (WACC) is:
The average cost of the firm's debt and equity.
The rate of return that the firm must generate in order to satisfy its investors and creditors.
The minimum rate of return that the firm must generate on its new investments in order to increase shareholder value
All of the above.
A firm with a higher debt-to-equity ratio will have a:
HIgher WACC
Lower WACC
Same WACC
Cannot be determined.
Calculate the WACC for a firm with the following capital structure:
¬ Debt: 50%
¬ Equity: 50%
¬ Cost of debt: 6%
¬ Cost of equity: 10%
WACC 8%
WACC 4%
WACC 9%
WACC 5%
The Modigliani-Miller theorem states that the value of a firm is independent of its capital structure. This theorem is based on the following assumptions:
Perfect capital markets
No taxes
No agency costs
All of the above
What are some ways to mitigate the financial risk of a leveraged capital structure?
Holding a cushion of cash reserves. maintaining a diversified portfalio of assets, and hedging against interest rate changes.
Increasing the firm's dividend payout ratio, selling off assets, and repurchasing shares.
Reducing the firm's debt-to-equity eratio, issuing new equity, and paying down debt.
All of the above
What type of firm is more likely to have a high debt-to-equity ratio?
A firm with a stable business model and low growth prospects.
A firm with a volatile business model and high growth prospects.
A firm with a high tax rate.
All of the above.
Which is the capital structure decision?
The decision of how to finance the firm's assets with debt and equity.
The decision of how to invest the firm's cash reserves.
The decision of how to allocate the firm's profits between dividends and retained earnings
All of the above
Which of the following ifactors is NOT considered when determining a firm's optimal capital structure?
The firm's tax rate
The firm's business risk
The firm's financial risk
The firm's risk appetite
A firm is considering increasing its dividend payout ratio. WHich is the following statements is TRUE?
Increasing the dividend payout ratio will reduce the firm's cash reserves and make it more vulnerable to financial shocks.
Increasing the dividend payout ratio will signal to investors that the firm is confident in its future growth prospects.
Increasing the dividend payout ratio will make the firm more attractive to investors, as it will provide them with a higher return on their investment.
All of the above.
In the absence of taxes, what is the relationship between a firm's cost of equity and its use of debt according to Modigliani-Miller Proposition I?
Cost of equity increases with more debt.
Cost of equity decreases with more debt.
Cost of equity is unaffected by the use of debt.
Cost of equity is inversely proportional to the use of debt.
How does the tax shield on interest payments impact the cost of debt financing for a leveraged firm?
Increases the cost of debt.
Has no effect on the cost of debt.
Reduces the cost of debt.
Eliminates the need for debt financing.
In the context of Modigllani-Miller Proposition ll, how does the tax shield influence the cost of equity for a leveraged firm?
Increases the cost of equity.
Has no effect on the cost of equity.
Reduces the cost of equity..
Eliminates the need for equity financing.
According to Modigliani-Miller Proposition in a worid with no taxes and perfect capital markets, how does the capital structure affect a firm's overall value?
Capital structure has no impact on the firm's value.
Firms with more debt have higher values.
Firms with more equity have higher values.
Capital structure only affects the cost of debt.
