Brealey. Myers. Allen Chapter 17 Test

Brealey. Myers. Allen Chapter 17 Test - Chapter 17 Does...

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Brealey/Myers/Allen, Principles of Corporate Finance, 8/e 179 Chapter 17 Does Debt Policy Matter? Multiple Choice Questions 1. When a firm has no debt, then such a firm is known as: (I) an unlevered firm (II) a levered firm (III) an all-equity firm A) I only B) II only C) III only D) I and III only Answer: D Type: Easy Page: 445 2. Capital structure of the firm can be defined as: (I) The firm's debt-equity ratio (II) The firm's mix of different securities used to finance assets (III) The market imperfection that the firm's manager can exploit A) I only B) II only C) III only D) I, II, and III Answer: B Type: Easy Page: 445 3. Under what conditions would a policy of maximizing the value of the firm not be the same as a policy of maximizing shareholders' wealth? A) If the issue of debt increases the probability of bankruptcy B) If the firm issues debt for the first time C) If the beta of equity is positive D) If an issue of debt affects the value of existing debt Answer: D Type: Difficult Page: 446 4. A policy of maximizing the value of the firm is the same as a policy of maximizing the shareholders' wealth rests on two important assumptions. They are: (I) The firm can ignore dividend policy (II) The debt equity ratio of the firm does not change (III) An issue of new debt does not affect the value of existing debt A) I only B) II only C) III only D) I and III only Answer: D Type: Difficult Page: 446
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180 5. Modigliani and Miller's Proposition I states that: A) The market value of any firm is independent of its capital structure B) The market value of a firm's debt is independent of its capital structure C) The market value of a firm's common stock is independent of its capital structure D) None of the above Answer: A Type: Difficult Page: 447 6. An investor can create the effect of leverage on his/her account by: (I) buying equity of an unlevered firm (II) by investing in risk-free debt like T-bills (III) by borrowing on his/her own account A) I only B) II only C) III only D) I and III only Answer: D Type: Medium Page: 448 7. The law of conservation of value implies that: A) The value of a firm's common stock is unchanged when debt is added to its capital structure B) The value of any asset is preserved regardless of the nature of the claims against it C) The value of a firm's debt is unchanged when common stock is added to its capital structure D) None of the above Answer: B Type: Difficult Page: 448 8. An investor can undo the effect of leverage on his/her own account by: (I) investing in the equity of a levered firm (II) by borrowing on his/her own account (III) by investing in risk-free debt like T-bills A) I only B) II only C) III only D) I and III above Answer: D Type: Medium Page: 448 9. If an individual wanted to borrow with limited liability he/she should A) Invest in the equity of an unlevered firm B) Borrow on his/her own account C) Invest in the equity of a levered firm D) Invest in a risk-free asset like T-bills Answer: C
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This note was uploaded on 04/18/2010 for the course FINANCE 936116531 taught by Professor Wuyiling during the Spring '10 term at Nashville State Community College.

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Brealey. Myers. Allen Chapter 17 Test - Chapter 17 Does...

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