BADM 710 Final Test
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. - ANS-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. - ANS-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. - ANS-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.
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. - ANS-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. - ANS-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. -
ANS-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. - ANS-A: has the same general implications as MM Proposition II without taxes.
A firm has a debt-equity ratio of .64, a pretax cost of debt of 8.5 percent, and a required return
on assets of 12.6 percent. What is the cost of equity if you ignore taxes?
Requrired Return on assets:
12.6% = (((. +.64) x 0.085) + (1 / .64+1) x Cost of equity)
12.6% = 3.317% + .609 x Cost of equity
Cost of equity = (12.6% - 3.317% / .609)
Cost of Equity = 15.22%
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller ACTUALSTUDY. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $7.99. You're not tied to anything after your purchase.