Essay about Capital Structure Multiple Choice Questions

7414 Words Feb 26th, 2012 30 Pages
ch. 16 question

15-1

CHAPTER 15

Capital Structure: Basic Concepts

Multiple Choice Questions:

I. DEFINITIONS

HOMEMADE LEVERAGE

a 1. The use of personal borrowing to change the overall amount of financial leverage to which an

individual is exposed is called:

a. homemade leverage.

b. dividend recapture.

c. the weighted average cost of capital.

d. private debt placement.

e. personal offset.

Difficulty level: Easy

MM PROPOSITION I

b 2. 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
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b. changing the capital structure if and only if the value of the firm increases to the benefits to

inside management.

c. changing the capital structure if and only if the value of the firm increases only to the benefits

the debtholders.

d. changing the capital structure if and only if the value of the firm increases although it

decreases the stockholders' value.

e. changing the capital structure if and only if the value of the firm increases and stockholder

wealth is constant.

Difficulty level: Easy

EPS-EBI ANALYSIS

d 12. The effect of financial leverage depends on the operating earnings of the company. Which of

the following is not true?

a. Below the indifference or break-even point in EBIT the non-levered structure is superior.

b. Financial leverage increases the slope of the EPS line.

c. Above the indifference or break-even point the increase in EPS for all equity plans is less than

debt-equity plans.

d. Above the indifference or break-even point the increase in EPS for all equity plans is greater

than debt-equity plans.

e. The rate of return on operating assets is unaffected by leverage.

Difficulty level: Medium 15-4

MM PROPOSITION I

a 13. The Modigliani-Miller Proposition I without taxes states:

a. a firm cannot change the total value of its outstanding securities by changing its capital

structure

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