FIN 701 Chapter 6 Part 1 Exam
Questions and Answers
A firm should select the capital structure that? - Answer-maximizes the value of the firm
The Value of a firm is maximized when the: - Answer-Weighted average cost of capital
is minimized.
The Optimal capital structure has been achieved when the - Answer-debt-equity ratio
results in the lowest possible weighted average cost of capital.
Assume you are reviewing a graph that plots earnings per share (EPS) against earnings
before interest and taxes (EBIT). The steeper the slope of the ploted line the: - Answer-
The greater the sensitivity of EPS to change in EBIT.
You have computed the break-even point between a levered and unlevered capital
structure. Ignore taxes, At the break even level, the: - Answer-Company is earning just
enough to pay for the cost of the debt.
Which one of the following statements is correct in relation to M&M Proposition II,
without taxes? - Answer-The required return on assets is equal to the weighted average
cost of capital.
The business risk of a company: - Answer-Has a positive relationship with the
companys cost of equity.
Which one of the following is the equity risk that is most related to the daily operations
of a firm? - Answer-Business Risk
Financial risk is? - Answer-Dependant upon a company's capital structure.
Which one of the following states that the value of a company is unrelated to the
companys capital structure? - Answer-M&M Proposition I, no tax
Westover mills reduced its taxes last year by $210 by increasing interest expense by
$1000. Which one of the following terms is used to describe this tax saving? - Answer-
Interest Tax Shield
M&M proposition I with tax implies that the: - Answer-Weighted Average cost of capital
decreases as the debt-equity ration increases
The interest tax shield is a key reason why; - Answer-The net cost of debt is generally
less than the cost of equity.
Questions and Answers
A firm should select the capital structure that? - Answer-maximizes the value of the firm
The Value of a firm is maximized when the: - Answer-Weighted average cost of capital
is minimized.
The Optimal capital structure has been achieved when the - Answer-debt-equity ratio
results in the lowest possible weighted average cost of capital.
Assume you are reviewing a graph that plots earnings per share (EPS) against earnings
before interest and taxes (EBIT). The steeper the slope of the ploted line the: - Answer-
The greater the sensitivity of EPS to change in EBIT.
You have computed the break-even point between a levered and unlevered capital
structure. Ignore taxes, At the break even level, the: - Answer-Company is earning just
enough to pay for the cost of the debt.
Which one of the following statements is correct in relation to M&M Proposition II,
without taxes? - Answer-The required return on assets is equal to the weighted average
cost of capital.
The business risk of a company: - Answer-Has a positive relationship with the
companys cost of equity.
Which one of the following is the equity risk that is most related to the daily operations
of a firm? - Answer-Business Risk
Financial risk is? - Answer-Dependant upon a company's capital structure.
Which one of the following states that the value of a company is unrelated to the
companys capital structure? - Answer-M&M Proposition I, no tax
Westover mills reduced its taxes last year by $210 by increasing interest expense by
$1000. Which one of the following terms is used to describe this tax saving? - Answer-
Interest Tax Shield
M&M proposition I with tax implies that the: - Answer-Weighted Average cost of capital
decreases as the debt-equity ration increases
The interest tax shield is a key reason why; - Answer-The net cost of debt is generally
less than the cost of equity.
