6. If a firm has leverage of 0.5, then this is equivalent to saying that it has a debt-to-equity ratio equal to:
a. 0.33
b. 0.5
c. 0.67
d. 1
e. 1.33
f. None of the above

 

7. If the conditions under which capital structure is irrelevant for firm value hold, then the shape of a firm's WACC function can be described as:
a. A convex parabolic curve
b. A straight horizontal line
c. A straight line with positive slope
d. A straight line with negative slope
e. None of the above

8. In the presence of tax benefits, but no financial distress costs, the shape of a firm's WACC function can be described as:
a. A convex parabolic curve
b. A straight horizontal line
c. A straight line with positive slope
d. A straight line with negative slope
e. None of the above

 

9. If the conditions under which capital structure is irrelevant for firm value hold, then the shape of the function relating shareholders' expected returns to firm leverage can be described as:
a. An upward sloping curve, because the level of risk faced by shareholders increases as leverage increases
b. A straight horizontal line, because the level of risk faced by shareholders is determined by only business risk and is therefore invariant with respect to leverage
c. A downward sloping curve, because the level of risk faced by shareholders decreases as leverage increases
d. All of the above
e. None of the above

 

10. Calculating the NPV of a project using a firm's overall WACC will result in:
a. Incorrectly accepting projects of below-average risk
b. Incorrectly accepting projects of above-average  risk
c. Incorrectly rejecting projects of below-average risk
d. Incorrectly rejecting projects of above-average risk
e. a and d only
f. b and c only
g. All of the above

 

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