1. What is the invested capital given the following? Accounts receivable = $50,000; current assets = $200,000; total assets = $700,000; shareholders’ equity = $440,000; accounts payable = $10,000; short-term debt = $100,000; and long-term debt = $150,000.
a. $700,000
b. $740,000
c. $690,000
d. $590,000

2. Which of the following statements is true?
a. Equity dollars are different from debt dollars.
b. ROI is not affected by business risk.
c. Each new dollar invested in a firm earns an incremental and different ROI.
d. ROE is affected by financial risk.

3. Which of the following statements is false?
a. The slope of the financial leverage line is (1 + debt-equity ratio).
b. ROE = ROI if a firm is 100 percent financed by debt.
c. The intercept of the financial leverage line is the debt-equity ratio times the after-tax cost of debt.
d. One of the break-even points is when two financial strategies have the same ROE.

4. Which of the following statements of rules of financial leverage is false?
a. The use of debt normally decreases the expected ROE.
b. The higher the debt-equity ratio, the steeper the financial leverage line.
c. Debt financing increases the risk to common shareholders.
d. Debt financing increases the chances of financial distress.

5. The EPS-EBIT line
a. Is steeper if there are more shares outstanding.
b. Has a slope equal to EBIT (1 − T)/#.
c. Has an intercept equal to RDB (1 − T)/#.
d. Indicates that if EBIT = 0, EPS = −RD B(1 − T)/#.

6. Which of the following is not an assumption of M&M’s irrelevance theorem?
a. Two firms exist with different levels of debt.
b. There is no tax.
c. Transaction costs are minimal.
d. There is no risk of costly bankruptcy.

7. Which of the following will result in a decrease in the weighted average cost of capital (WACC)?
a. A decrease in TC
b. An increase in the cost of debt
c. An increase in the cost of equity
d. A decrease in the weight of equity

8. In the M&M irrelevance world, which of the following is false?
a. The cost of equity increases as the debt-equity ratio increases.
b. If the expected ROI of a project is greater than the WACC, the share price will go up.
c. The firm’s objective is to increase the market value of the share price, not EPS.
d. The WACC always increases as the debt-equity ratio increases.

9. What is the cost of equity for a levered firm given the following? KU = 10%; KD = 5%; T = 20%; and D/SL = 0.6.
a. 13%
b. 10.6%
c. 12.4%
d. 14.8%

10. Which of the firms below is the most likely to raise debt in the capital market?
a. A profitable firm that has a risky underlying business
b. A large and profitable firm with stable earnings and cash from operations
c. A less profitable firm that has a non-risky business and cyclical cash flows
d. A small firm that has seen its share price decrease in the past

  • CreatedFebruary 25, 2015
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