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Chapter16-CapitalStructure:BasicConcepts16-1Chapter16CapitalStructure:BasicConceptsMultipleChoiceQuestions1.Theuseofpersonalborrowingtochangetheoverallamountoffinancialleveragetowhichanindividualisexposediscalled:A.homemadeleverage.B.dividendrecapture.C.theweightedaveragecostofcapital.D.privatedebtplacement.E.personaloffset.2.Thepropositionthatthevalueofthefirmisindependentofitscapitalstructureiscalled:A.thecapitalassetpricingmodel.B.MMPropositionI.C.MMPropositionII.D.thelawofoneprice.E.theefficientmarketshypothesis.3.Thepropositionthatthecostofequityisapositivelinearfunctionofcapitalstructureiscalled:A.thecapitalassetpricingmodel.B.MMPropositionI.C.MMPropositionII.D.thelawofoneprice.E.theefficientmarketshypothesis.4.Thetaxsavingsofthefirmderivedfromthedeductibilityofinterestexpenseiscalledthe:A.interesttaxshield.B.depreciablebasis.C.financingumbrella.D.currentyield.E.tax-losscarryforwardsavings.Chapter16-CapitalStructure:BasicConcepts16-25.Theunleveredcostofcapitalis:A.thecostofcapitalforafirmwithnoequityinitscapitalstructure.B.thecostofcapitalforafirmwithnodebtinitscapitalstructure.C.theinteresttaxshieldtimespretaxnetincome.D.thecostofpreferredstockforafirmwithequalpartsdebtandcommonstockinitscapitalstructure.E.equaltotheprofitmarginforafirmwithsomedebtinitscapitalstructure.6.Thecostofcapitalforafirm,rWACC,inazerotaxenvironmentis:A.equaltotheexpectedearningsdividedbymarketvalueoftheunleveredfirm.B.equaltotherateofreturnforthatbusinessriskclass.C.equaltotheoverallrateofreturnrequiredontheleveredfirm.D.isconstantregardlessoftheamountofleverage.E.Alloftheabove.7.Thedifferencebetweenamarketvaluebalancesheetandabookvaluebalancesheetisthatamarketvaluebalancesheet:A.placesassetsontherighthandside.B.placesliabilitiesonthelefthandside.C.doesnotequatetherighthandwiththelefthandside.D.listsitemsintermsofmarketvalues,nothistoricalcosts.E.usesthemarketrateofreturn.8.Thefirm'scapitalstructurerefersto:A.thewayafirminvestsitsassets.B.theamountofcapitalinthefirm.C.theamountofdividendsafirmpays.D.themixofdebtandequityusedtofinancethefirm'sassets.E.howmuchcashthefirmholds.Chapter16-CapitalStructure:BasicConcepts16-39.Ageneralruleformanagerstofollowistosetthefirm'scapitalstructuresuchthat:A.thefirm'svalueisminimized.B.thefirm'svalueismaximized.C.thefirm'sbondholdersaremadewelloff.D.thefirmssuppliersofrawmaterialsaresatisfied.E.thefirmsdividendpayoutismaximized.10.Aleveredfirmisacompanythathas:A.AccountsPayableastheonlyliabilityonthebalancesheet.B.somedebtinthecapitalstructure.C.allequityinthecapitalstructure.D.Alloftheabove.E.Noneoftheabove.11.Amanagershouldattempttomaximizethevalueofthefirmby:A.changingthecapitalstructureifandonlyifthevalueofthefirmincreases.B.changingthecapitalstructureifandonlyifthevalueofthefirmincreasestothebenefitofinsidemanagement.C.changingthecapitalstructureifandonlyifthevalueofthefirmincreasesonlytothebenefitsofthedebtholders.D.changingthecapitalstructureifandonlyifthevalueofthefirmincreasesalthoughitdecreasesthestockholders'value.E.changingthecapitalstructureifandonlyifthevalueofthefirmincreasesandstockholderwealthisconstant.12.Theeffectoffinancialleveragedependsontheoperatingearningsofthecompany.Whichofthefollowingisnottrue?A.Belowtheindifferenceorbreak-evenpointinEBITthenon-leveredstructureissuperior.B.FinancialleverageincreasestheslopeoftheEPSline.C.Abovetheindifferenceorbreak-evenpointtheincreaseinEPSforallequitystructuresislessthandebt-equitystructures.D.Abovetheindifferenceorbreak-evenpointtheincreaseinEPSforallequitystructuresisgreaterthandebt-equitystructures.E.Therateofreturnonoperatingassetsisunaffectedbyleverage.Chapter16-CapitalStructure:BasicConcepts16-413.TheModigliani-MillerPropositionIwithouttaxesstates:A.afirmcannotchangethetotalvalueofitsoutstandingsecuritiesbychangingitscapitalstructureproportions.B.whennewprojectsareaddedtothefirmthefirmvalueisthesumoftheoldvalueplusthenew.C.managerscanmakecorrectcorporatedecisionsthatwillsatisfyallshareholdersiftheyselectprojectsthatmaximizevalue.D.thedeterminationofvaluemustconsiderthetimingandriskofthecashflows.E.Noneoftheabove.14.MMPropositionIwithouttaxesisusedtoillustrate:A.thevalueofanunleveredfirmequalsthatofaleveredfirm.B.thatonecapitalstructureisasgoodasanother.C.leveragedoesnotaffectthevalueofthefirm.D.capitalstructurechangeshavenoeffectonstockholders'welfare.E.Alloftheabove.15.AkeyassumptionofMM'sPropositionIwithouttaxesis:A.thatfinancialleverageincreasesrisk.B.thatindividualscanborrowontheirownaccountatrateslessthanthefirm.C.thatindividualsmustbeabletoborrowontheirownaccountatratesequaltothefirm.D.managersareactingtomaximizethevalueofthefirm.E.Alloftheabove.16.InanEPS-EBIgraphicalrelationship,theslopeofthedebtrayissteeperthantheequityray.Thedebtrayhasalowerinterceptbecause:A.moresharesareoutstandingforthesamelevelofEBI.B.thebreak-evenpointishigherwithdebt.C.afixedinterestchargemustbepaidevenatlowearnings.D.theamountofinterestpersharehasonlyapositiveeffectontheintercept.E.thehighertheinterestratethegreatertheslope.Chapter16-CapitalS