Capital Structure Multiple Choice Questions

7430 WordsMar 7, 201230 Pages
ch. 16 question 15-1 CHAPTER 15 Capital Structure: Basic Concepts Multiple Choice Questions: I. DEFINITIONS HOMEMADE LEVERAGE a 1. The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called: a. homemade leverage. b. dividend recapture. c. the weighted average cost of capital. d. private debt placement. e. personal offset. Difficulty level: Easy MM PROPOSITION I b 2. The proposition that the value of the firm is independent of its capital structure is called: a. the capital asset pricing model. b. MM Proposition I. c. MM Proposition II. d. the law of one price. e. the efficient…show more content…
c. managers can make correct corporate decisions that will satisfy all shareholders if they select projects that maximize value. d. the determination of value must consider the timing and risk of the cash flows. e. None of the above. Difficulty level: Medium MM PROPOSITION I e 14. MM Proposition I without taxes is used to illustrate: a. the value of an unlevered firm equals that of a levered firm. b. that one capital structure is as good as another. c. leverage does not affect the value of the firm. d. capital structure changes have no effect stockholder's welfare. e. All of the above. Difficulty level: Medium MM PROPOSITION I c 15. A key assumption of MM's Proposition I without taxes is: a. that financial leverage increases risk. b. that individuals can borrow on their own account at rates less than the firm. c. that individuals must be able to borrow on their own account at rates equal to the firm. d. managers are acting to maximize the value of the firm. e. All of the above. Difficulty level: Medium EPS-EBI ANALYSIS c 16. In an EPS-EBI graphical relationship, the slope of the debt ray is steeper than the equity ray. The debt ray has a lower intercept because: a. more shares are outstanding for the same level of EBI. b. the break-even point is higher with debt. c. a fixed interest charge must be paid even at low
Open Document