Questions $1$:

Multiple$-$choice questions

$1.$The optimal capital structure is the mixture of debt and equity which:

I. Maximizes the value of the firm.

II$.$ Minimizes the firm's weighted average cost of capital.

III. Maximizes the market price of the firm's bonds.

A$)$ III only

B$)$ I only

C$)$ I and III only

D$)$ I and II only

E$)$ I, II and III

$2.$ The weighted average cost of capital for a firm is the:

A$.$ discount rate which the firm should apply to all of the projects it un

B$.$ overall rate which the firm must earn on its existing assets to mainta stock.

C$.$ rate the firm should expect to pay on its next bond issue.

D$.$ maximum rate which the firm should require on any projects it und

$3.$According to pecking order theory, managers will often choose to finan

A$)$ new equity rather than debt, due to bankruptcy costs.

B$)$ debt rather than new equity, to avoid reduced share price.

C$)$ debt rather than retained earnings, to lower the WACC.

D$)$ new equity rather than debt, to strengthen EPS.

$4.$Which one of the following statements matches M&M Proposition I?

A$.$ The cost of equity capital has a positive linear relationship with a firm'

$3.$ The dividends paid by a firm determine the firm's value.

C$.$ The cost of equity capital varies in response to changes in a firm's capit

D$.$ The value of a firm is independent of the firm's capital structure.