Capital Structure and Leverage 1

Capital Structure - asset or unlevered beta unless the firm also changes the composition(i.e risk of its assets A True B False 5 In a world with no

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Old Exam Questions - Capital Structure and Leverage Page 1 of 31 Pages Capital Structure and Leverage 1. The optimal capital structure for a firm simultaneously maximizes EPS and minimizes the weighted average cost of capital (WACC). A. True B. False 2. When a company increases its debt ratio, the costs of equity and debt capital both increase. Therefore, the weighted average cost of capital (WACC) must also increase. A. True B. False 3. Because of leverage effects and tax shelter effects, a firm’s use of additional debt financing will increase the firm’s return on equity, but may also increase the stockholders’ required rate of return. A. True B. False 4. A change in a firm’s capital structure (debt versus equity) can have an immediate impact on the levered or equity beta of the firm’s stock, but should have no impact on the firm’s
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Unformatted text preview: asset or unlevered beta unless the firm also changes the composition (i.e., risk) of its assets. A. True B. False 5. 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 6. In a world with no taxes, MM (Modigliani and Miller) show that the capital structure of a firm does not affect the value of the firm (i.e., capital structure is irrelevant). However, when taxes are considered, MM show a positive relationship between debt and value (i.e., firm’s should go towards 100 percent debt financing). A. True B. False...
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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