Essay about Capital Structure Multiple Choice Questions
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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 …show more content…
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 …show more content…
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
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