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Unformatted text preview: Econ 333 - Financial Economics Spring 08 Practice final: Exercise 1: Multiple choice. (2 points each) - expect only 5 questions on the exam 1- MM Proposition I without taxes is used to illustrate: a. the value of an unlevered firm equals that of a levered firm. b. that one capital structure is as good as another. c. leverage does not affect the value of the firm. d. capital structure changes have no effect stockholders welfare. e. All of the above. 2 - The interest tax shield has no value for a firm when: I. the tax rate is equal to zero. II. the debt-equity ratio is exactly equal to 1. III. the firm is unlevered. IV. a firm elects 100% equity as its capital structure. a. I and III only b. II and IV only c. I, III, and IV only d. II, III, and IV only e. I, II, and IV only 3 - Financial leverage impacts the performance of the firm by: a. increasing the volatility of the firms EBIT. b. decreasing the volatility of the firms EBIT. c. decreasing the volatility of the firms net income. d. increasing the volatility of the firms net income e. None of the above. 4 - MM Proposition II is the proposition that: a. supports the argument that the capital structure of a firm is irrelevant to the value of the firm. b. the cost of equity depends on the return on debt, the debt-equity ratio and the tax rate. c. a firms cost of equity capital is a positive linear function of the firms capital structure. d. the cost of equity is equivalent to the required return on the total assets of a firm. e. supports the argument that the size of the pie does not depend on how the pie is sliced. 5 - Thompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding. The company is in the process of borrowing $8 million at 9% interest to repurchase 200,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes?...
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- Spring '08