FINA 4001 Final Exam UPDATED ACTUAL
Exam Questions and CORRECT Answers
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 a firm with equal parts debt and common stock in its capital
structure.
E. equal to the profit margin for a firm with some debt in its capital structure. - CORRECT
ANSWER -B
Bryan invested in Bryco, Inc. stock when the firm was financed solely with equity. The firm is
now utilizing debt in its capital structure. To unlever his position, Bryan needs to:
A. borrow some money and purchase additional shares of Bryco stock.
B. maintain his current position as the debt of the firm did not affect his personal leverage
position.
C. sell some shares of Bryco stock and hold the proceeds in cash.
D. sell some shares of Bryco stock and loan it out such that he creates a personal debt-equity
ratio equal to that of the firm.
E. create a personal debt-equity ratio that is equal to exactly 50% of the debt-equity ratio of the
firm. - CORRECT ANSWER -D
Bruce & Co. expects its EBIT to be $185,000 every year forever. The firm can borrow at 9
percent. Bruce currently has no debt, and its cost of equity is 16 percent and the tax rate is 35
percent. The company borrows $135,000 and uses the proceeds to repurchase shares.
What is the cost of equity after recapitalization? - CORRECT ANSWER - 16.92%
, Bruce & Co. expects its EBIT to be $185,000 every year forever. The firm can borrow at 9
percent. Bruce currently has no debt, and its cost of equity is 16 percent and the tax rate is 35
percent. The company borrows $135,000 and uses the proceeds to repurchase shares.
What is the WACC after recapitalization? - CORRECT ANSWER - 15.05%
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 markets hypothesis. - CORRECT ANSWER -B
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 these. - CORRECT ANSWER -C
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
Exam Questions and CORRECT Answers
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 a firm with equal parts debt and common stock in its capital
structure.
E. equal to the profit margin for a firm with some debt in its capital structure. - CORRECT
ANSWER -B
Bryan invested in Bryco, Inc. stock when the firm was financed solely with equity. The firm is
now utilizing debt in its capital structure. To unlever his position, Bryan needs to:
A. borrow some money and purchase additional shares of Bryco stock.
B. maintain his current position as the debt of the firm did not affect his personal leverage
position.
C. sell some shares of Bryco stock and hold the proceeds in cash.
D. sell some shares of Bryco stock and loan it out such that he creates a personal debt-equity
ratio equal to that of the firm.
E. create a personal debt-equity ratio that is equal to exactly 50% of the debt-equity ratio of the
firm. - CORRECT ANSWER -D
Bruce & Co. expects its EBIT to be $185,000 every year forever. The firm can borrow at 9
percent. Bruce currently has no debt, and its cost of equity is 16 percent and the tax rate is 35
percent. The company borrows $135,000 and uses the proceeds to repurchase shares.
What is the cost of equity after recapitalization? - CORRECT ANSWER - 16.92%
, Bruce & Co. expects its EBIT to be $185,000 every year forever. The firm can borrow at 9
percent. Bruce currently has no debt, and its cost of equity is 16 percent and the tax rate is 35
percent. The company borrows $135,000 and uses the proceeds to repurchase shares.
What is the WACC after recapitalization? - CORRECT ANSWER - 15.05%
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 markets hypothesis. - CORRECT ANSWER -B
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 these. - CORRECT ANSWER -C
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
