MBA 621 EXAM 2 | COMPLETE QUESTIONS WITH EXPERT SOLUTIONS | 2026 LATEST
UPDATED | GET A+
1. Equity in a firm with no debt is called: levered equity.
- levered equity
-unlevered equity.
-riskless equity.
-risky equity.: unlevered equity
2. Which of the following statements is FALSE?
- Modigliani and Miller's conclusion verified the common view, which stated that even with perfect capital markets,
leverage would affect a firm's value. - We can evaluate the relationship between risk and return more formally by
computing the sensitivity of each security's return to the systematic risk of the economy.
- Investors in levered equity require a higher expected return to compensate for its increased risk.
- Leverage increases the risk of equity even when there is no risk that the firm
will default.: Modigliani and Miller's conclusion verified the common view, which stated that even with perfect capital
markets, leverage would affect a firm's value.
3. Which of the following statements is/are FALSE?
I) Leverage decreases the risk of the equity of a firm.
II) Because the cash flows of the debt and equity sum to the cash flows of the project, by the Law of One Price the
combined values of debt and equity must be equal to the cash flows of the project.
III) Franco Modigliani and Merton Miller argued that with perfect capital markets, the total value of a firm depends
on its capital structure.: I and III only 4. Consider a project with free cash flows in one year of $90,000 in a weak
, economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required
for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%.Suppose that to
raise the funds for the initial investment, the project is sold to investors as an all-equity firm. The equity holders will
receive the cash flows of the project in one year. The market value of the unlevered equity for this project is closest
to:: $90,000
5. Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong
economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the
project's cost of capital is 15%. The risk-free interest rate is 5%.Suppose that to raise the funds for the initial investment
the firm borrows $80,000 at the risk free rate, then the cash flow that equity holders will receive in one year in a strong
economy is closest to:: $33,000
6. Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong
economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the
project's cost of capital is 15%. The risk-free interest rate is 5%.Suppose that to raise the funds for the initial investment
the firm borrows $80,000 at the risk free rate, then the value of the firm's levered equity from the project is closest to::
$10,000
7. Which of the following is NOT one of Modigliani and Miller's set of conditions referred to as perfect capital
markets?
I) All investors hold the market portfolio.
II) There are no taxes, transaction costs, or issuance costs associated with security trading.
III) A firm's financing decisions do not change the cash flows generated by its investments, nor do they reveal new
information about them.
IV) Investors and firms can trade the same set of securities at competitive market prices equal to the present value of
their future cash flows.: I only 8. Which of the following statements is FALSE?
, - The Law of One Price implies that leverage will affect the total value of the firm under perfect capital market
conditions.
- In the absence of taxes or other transaction costs, the total cash flow paid out to all of a firm's security holders is
equal to the total cash flow generated by the firm's assets.
- With perfect capital markets, leverage merely changes the allocation of cash flows between debt and equity,
without altering the total cash flows of the firm.
- In a perfect capital market, the total value of a firm is equal to the market value of the total cash flows generated
by its assets and is not affected by its
choice of capital structure.: The Law of One Price implies that leverage will affect the total value of the firm under perfect
capital market conditions.
9. Consider two firms, With and Without, that have identical assets that generate identical cash flows. Without is an
all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. With has 2 million shares
outstanding and $12 million dollars in debt at an interest rate of 5%. According to MM Proposition 1, the stock price for
With is closest to:: $6.00
10. Suppose that Taggart Transcontinental currently has no debt and has an equity cost of capital of 10%. Taggart is
considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock. Assume perfect
capital markets. If Taggart borrows until they achieved a debt-to-value ratio of 20%, then Taggart's levered cost of equity
would be closest to:: 11.0% 11. Which of the following statements is FALSE?
- With no debt, the WACC is equal to the unlevered equity cost of capital. - With perfect capital markets, a firm's WACC
is dependent of its capital structure and is equal to its equity cost of capital only the firm it is unlevered. - As the firm
borrows at the low cost of capital for debt, its equity cost of capital rises, but the net effect is that the firm's WACC is
unchanged.
- Although debt has a lower cost of capital than equity, leverage does not lower
UPDATED | GET A+
1. Equity in a firm with no debt is called: levered equity.
- levered equity
-unlevered equity.
-riskless equity.
-risky equity.: unlevered equity
2. Which of the following statements is FALSE?
- Modigliani and Miller's conclusion verified the common view, which stated that even with perfect capital markets,
leverage would affect a firm's value. - We can evaluate the relationship between risk and return more formally by
computing the sensitivity of each security's return to the systematic risk of the economy.
- Investors in levered equity require a higher expected return to compensate for its increased risk.
- Leverage increases the risk of equity even when there is no risk that the firm
will default.: Modigliani and Miller's conclusion verified the common view, which stated that even with perfect capital
markets, leverage would affect a firm's value.
3. Which of the following statements is/are FALSE?
I) Leverage decreases the risk of the equity of a firm.
II) Because the cash flows of the debt and equity sum to the cash flows of the project, by the Law of One Price the
combined values of debt and equity must be equal to the cash flows of the project.
III) Franco Modigliani and Merton Miller argued that with perfect capital markets, the total value of a firm depends
on its capital structure.: I and III only 4. Consider a project with free cash flows in one year of $90,000 in a weak
, economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required
for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%.Suppose that to
raise the funds for the initial investment, the project is sold to investors as an all-equity firm. The equity holders will
receive the cash flows of the project in one year. The market value of the unlevered equity for this project is closest
to:: $90,000
5. Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong
economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the
project's cost of capital is 15%. The risk-free interest rate is 5%.Suppose that to raise the funds for the initial investment
the firm borrows $80,000 at the risk free rate, then the cash flow that equity holders will receive in one year in a strong
economy is closest to:: $33,000
6. Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong
economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the
project's cost of capital is 15%. The risk-free interest rate is 5%.Suppose that to raise the funds for the initial investment
the firm borrows $80,000 at the risk free rate, then the value of the firm's levered equity from the project is closest to::
$10,000
7. Which of the following is NOT one of Modigliani and Miller's set of conditions referred to as perfect capital
markets?
I) All investors hold the market portfolio.
II) There are no taxes, transaction costs, or issuance costs associated with security trading.
III) A firm's financing decisions do not change the cash flows generated by its investments, nor do they reveal new
information about them.
IV) Investors and firms can trade the same set of securities at competitive market prices equal to the present value of
their future cash flows.: I only 8. Which of the following statements is FALSE?
, - The Law of One Price implies that leverage will affect the total value of the firm under perfect capital market
conditions.
- In the absence of taxes or other transaction costs, the total cash flow paid out to all of a firm's security holders is
equal to the total cash flow generated by the firm's assets.
- With perfect capital markets, leverage merely changes the allocation of cash flows between debt and equity,
without altering the total cash flows of the firm.
- In a perfect capital market, the total value of a firm is equal to the market value of the total cash flows generated
by its assets and is not affected by its
choice of capital structure.: The Law of One Price implies that leverage will affect the total value of the firm under perfect
capital market conditions.
9. Consider two firms, With and Without, that have identical assets that generate identical cash flows. Without is an
all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. With has 2 million shares
outstanding and $12 million dollars in debt at an interest rate of 5%. According to MM Proposition 1, the stock price for
With is closest to:: $6.00
10. Suppose that Taggart Transcontinental currently has no debt and has an equity cost of capital of 10%. Taggart is
considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock. Assume perfect
capital markets. If Taggart borrows until they achieved a debt-to-value ratio of 20%, then Taggart's levered cost of equity
would be closest to:: 11.0% 11. Which of the following statements is FALSE?
- With no debt, the WACC is equal to the unlevered equity cost of capital. - With perfect capital markets, a firm's WACC
is dependent of its capital structure and is equal to its equity cost of capital only the firm it is unlevered. - As the firm
borrows at the low cost of capital for debt, its equity cost of capital rises, but the net effect is that the firm's WACC is
unchanged.
- Although debt has a lower cost of capital than equity, leverage does not lower
