Capital Structure and Leverage 2

Capital Structure and Leverage 2 - where no leverage is...

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Old Exam Questions - Capital Structure and Leverage Page 2 of 31 Pages 7. The optimal capital structure for a firm will maximize the firm’s weighted average cost of capital and minimize the firm’s net income (i.e., the free cash flow that goes to the equity shareholders). A. True B. False 8. The optimal capital structure for a firm will minimize the firm’s weighted average cost of capital and maximize the firm’s net income (i.e., the free cash flow that goes to the equity shareholders). A. True B. False 9. Modigliani and Miller showed that in a world without taxes, a firm’s optimal capital structure would be to go towards 100 percent debt financing. A. True B. False 10. The graphical probability distribution for return on equity (ROE) when financial leverage is used, would tend to be more peaked and have less dispersion than a distribution
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Unformatted text preview: where no leverage is present, other things held constant. A. True B. False 11. Financial leverage affects both EPS and EBIT, while operating leverage only affects EBIT. A. True B. False 1. Assume that the equity beta for an all equity (unlevered) firm is 1.0. Assume now that the firm changes its capital structure to 50% debt and 50% equity, using 8% debt financing, and a tax rate of 40%. You may also assume that the beta for debt is zero. Given these conditions, which of the following statements is most correct? A. The beta of the firms equity will increase. B. The beta of the firms underlying assets will increase. C. The beta of the firms equity will decrease. D. The beta of the firms underlying assets will decrease. E. The beta of the firms equity will remain unchanged. 2. Which of the following statements is incorrect (least correct )?...
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