BADM 710 Exam Questions With
Complete Solutions A+ Pass
The unlevered cost of capital is:
A: the cost of capital for a firm with no equity in its capital structure.
B: the cost of capital for a firm with no debt in its capital structure.
C: the interest tax shield times pretax net income.
D: the cost of preferred stock for an all-equity firm.
E: equal to the profit margin for a firm with some debt in its capital structure. -
CORRECT ANSWER-B: the cost of capital for a firm with no debt in its capital
structure.
The firm's capital structure refers to the:
A: mix of current and fixed assets a firm holds.
,B: amount of capital invested in the firm.
C: amount of dividends a firm pays.
D: mix of debt and equity used to finance the firm's assets.
E: amount of cash versus receivables the firm holds. - CORRECT ANSWER-D:
mix of debt and equity used to finance the firm's assets.
A manager should attempt to maximize the value of the firm by changing the
capital structure if and only if the value of the firm increases:
A: as a result of the change.
B: to the sole benefit of the managers.
C: to the sole benefit of the debtholders.
D: while also decreasing shareholder value.
E: while holding stockholder value constant. - CORRECT ANSWER-A: as a result
of the change.
MM Proposition I without taxes proposes that:
A: the value of an unlevered firm exceeds that of a levered firm.
B: there is one ideal capital structure for each firm.
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,C: leverage does not affect the value of the firm.
D: shareholder wealth is directly affected by the capital structure selected.
E: the value of a levered firm exceeds that of an unlevered firm. - CORRECT
ANSWER-C: leverage does not affect the value of the firm.
A key underlying assumption of MM Proposition I without taxes is that:
A: financial leverage increases risk.
B: individuals can borrow at lower rates than corporations.
C: individuals and corporations borrow at the same rate.
D: managers always act to maximize the value of the firm.
E: corporations are all-equity financed. - CORRECT ANSWER-C: individuals and
corporations borrow at the same rate.
MM Proposition I with taxes supports the theory that:
A: there is a positive linear relationship between the amount of debt in a levered
firm and its value.
B: the value of a firm is inversely related to the amount of leverage used by the
firm.
, C: the value of an unlevered firm is equal to the value of a levered firm plus the
value of the interest tax shield.
D: a firm's cost of capital is the same regardless of the mix of debt and equity used
by the firm.
E: a firm's weighted average cost of capital increases as the debt-equity ratio of the
firm rises. - CORRECT ANSWER-A: there is a positive linear relationship
between the amount of debt in a levered firm and its value.
MM Proposition II with taxes:
A: has the same general implications as MM Proposition II without taxes.
B: reveals how the interest tax shield relates to the value of a firm.
C: supports the argument that business risk is determined by the capital structure
employed by a firm.
D: supports the argument that the cost of equity decreases as the debt-equity ratio
increases.
E: reaches the final conclusion that the capital structure decision is irrelevant to the
value of a firm. - CORRECT ANSWER-A: has the same general implications as
MM Proposition II without taxes.
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Complete Solutions A+ Pass
The unlevered cost of capital is:
A: the cost of capital for a firm with no equity in its capital structure.
B: the cost of capital for a firm with no debt in its capital structure.
C: the interest tax shield times pretax net income.
D: the cost of preferred stock for an all-equity firm.
E: equal to the profit margin for a firm with some debt in its capital structure. -
CORRECT ANSWER-B: the cost of capital for a firm with no debt in its capital
structure.
The firm's capital structure refers to the:
A: mix of current and fixed assets a firm holds.
,B: amount of capital invested in the firm.
C: amount of dividends a firm pays.
D: mix of debt and equity used to finance the firm's assets.
E: amount of cash versus receivables the firm holds. - CORRECT ANSWER-D:
mix of debt and equity used to finance the firm's assets.
A manager should attempt to maximize the value of the firm by changing the
capital structure if and only if the value of the firm increases:
A: as a result of the change.
B: to the sole benefit of the managers.
C: to the sole benefit of the debtholders.
D: while also decreasing shareholder value.
E: while holding stockholder value constant. - CORRECT ANSWER-A: as a result
of the change.
MM Proposition I without taxes proposes that:
A: the value of an unlevered firm exceeds that of a levered firm.
B: there is one ideal capital structure for each firm.
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protected by copyright law
,C: leverage does not affect the value of the firm.
D: shareholder wealth is directly affected by the capital structure selected.
E: the value of a levered firm exceeds that of an unlevered firm. - CORRECT
ANSWER-C: leverage does not affect the value of the firm.
A key underlying assumption of MM Proposition I without taxes is that:
A: financial leverage increases risk.
B: individuals can borrow at lower rates than corporations.
C: individuals and corporations borrow at the same rate.
D: managers always act to maximize the value of the firm.
E: corporations are all-equity financed. - CORRECT ANSWER-C: individuals and
corporations borrow at the same rate.
MM Proposition I with taxes supports the theory that:
A: there is a positive linear relationship between the amount of debt in a levered
firm and its value.
B: the value of a firm is inversely related to the amount of leverage used by the
firm.
, C: the value of an unlevered firm is equal to the value of a levered firm plus the
value of the interest tax shield.
D: a firm's cost of capital is the same regardless of the mix of debt and equity used
by the firm.
E: a firm's weighted average cost of capital increases as the debt-equity ratio of the
firm rises. - CORRECT ANSWER-A: there is a positive linear relationship
between the amount of debt in a levered firm and its value.
MM Proposition II with taxes:
A: has the same general implications as MM Proposition II without taxes.
B: reveals how the interest tax shield relates to the value of a firm.
C: supports the argument that business risk is determined by the capital structure
employed by a firm.
D: supports the argument that the cost of equity decreases as the debt-equity ratio
increases.
E: reaches the final conclusion that the capital structure decision is irrelevant to the
value of a firm. - CORRECT ANSWER-A: has the same general implications as
MM Proposition II without taxes.
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protected by copyright law
