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FM11_Ch_17_Test_Bank

# FM11_Ch_17_Test_Bank - CHAPTER 17 CAPITAL STRUCTURE...

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CHAPTER 17 CAPITAL STRUCTURE DECISIONS: EXTENSIONS (Difficulty: E = Easy, M = Medium, T = Tough) True-False Easy: Taxes and capital structure Answer: a Diff: E 1 . In a world with no taxes, MM show that the capital structure of a firm does not affect the value of the firm. However, when taxes are considered, MM show a positive relationship between debt and value. a. True b. False Taxes and capital structure Answer: b Diff: E 2 . According to MM, in a world without taxes, the optimal capital structure for a firm is approximately 100 percent debt financing. a. True b. False Financial leverage Answer: a Diff: E 3 . Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient. a. True b. False MM Models Answer: b Diff: E 4 . MM showed that in a world without taxes, a firm’s optimal capital structure would be almost 100 percent debt. a. True b. False MM Models Answer: a Diff: E 5 . MM showed that in a world with taxes, a firm’s optimal capital structure would be almost 100 percent debt. a. True b. False Chapter 17 - Page 1

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MM Models Answer: a Diff: E 6 . MM showed that in a world without taxes, a firm’s value doesn’t depend on debt. a. True b. False Miller Model Answer: a Diff: E 7 . The Miller Model takes the MM Model with taxes and adds personal taxes. a. True b. False Miller Model Answer: b Diff: E 8 . The Miller Model takes the MM Model and assumes further that personal taxes are zero. a. True b. False Medium: MM Models Answer: a Diff: M 9 . The MM Model with corporate taxes is a special case of the Miller Model, but with zero personal taxes. a. True b. False MM Models Answer: b Diff: M 10 . The MM Model is a special case of the Miller Model, but with zero corporate taxes. a. True b. False MM extension with growth Answer: a Diff: M 11 . In the MM extension with growth, the appropriate discount rate for the tax shield is the unlevered cost of equity. a. True b. False Chapter 17 - Page 2
MM extension with growth Answer: b Diff: M 12 . In the MM extension with growth, the appropriate discount rate for the tax shield is the WACC. a. True b. False MM extension with growth Answer: b Diff: M 13 . In the MM extension with growth, the appropriate discount rate for the tax shield is the cost of debt. a. True b. False Equity as an option Answer: a Diff: M 14 . When a firm has risky debt, its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt. a. True b. False Equity as an option Answer: b Diff: M 15 . When a firm has risky debt, its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.

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