IFM10 Ch 16 Test Bank - CHAPTER 16 CAPITAL STRUCTURE...

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Unformatted text preview: CHAPTER 16 CAPITAL STRUCTURE DECISIONS: PART II (Difficulty: E = Easy, M = Medium, and T = Tough) True/False Easy: (16.1) Taxes and capital structure Answer: a Diff: E 1 . In a world with no taxes, MM show that a firms capital structure does not affect the firms value. However, when taxes are considered, MM show a positive relationship between debt and value, i.e., its value rises as its debt is increased. a. True b. False (16.1) 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% debt financing. a. True b. False (16.1) MM models Answer: a Diff: E 3 . MM showed that in a world with taxes, a firms optimal capital structure would be almost 100% debt. a. True b. False (16.1) MM models Answer: a Diff: E 4 . MM showed that in a world without taxes, a firms value is not affected by its capital structure. a. True b. False (16.2) Miller model Answer: a Diff: E 5 . The Miller model begins with the MM model with taxes and then adds personal taxes. a. True b. False (16.2) Miller model Answer: b Diff: E 6 . The Miller model begins with the MM model without corporate taxes and then adds personal taxes. Chapter 16: Capital Structure Decisions: Part II Page 3 a. True b. False (16.5) Financial leverage Answer: a Diff: E 7 . 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 Medium: (16.2) MM models Answer: a Diff: M 8 . The MM model with corporate taxes is the same as the Miller model, but with zero personal taxes. a. True b. False (16.2) MM models Answer: b Diff: M 9 . The MM model is the same as the Miller model, but with zero corporate taxes. a. True b. False (16.4) MM extension with growth Answer: a Diff: M 10 . In the MM extension with growth, the appropriate discount rate for the tax shield is the unlevered cost of equity. a. True b. False (16.4) MM extension with growth Answer: b Diff: M 11 . In the MM extension with growth, the appropriate discount rate for the tax shield is the WACC. a. True b. False (16.4) 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 after-tax cost of debt. a. True b. False (16.5) Equity as an option Answer: a Diff: M Page 4 Chapter 16: Capital Structure Decisions: Part II 13 . 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 Chapter 16: Capital Structure Decisions: Part II Page 5 (16.5) Equity as an option Answer: b Diff: M 14 . 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 equity....
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This note was uploaded on 11/10/2010 for the course FIN fi380 taught by Professor S during the Spring '10 term at University of Massachusetts Boston.

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IFM10 Ch 16 Test Bank - CHAPTER 16 CAPITAL STRUCTURE...

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