# 43 if beta of debt is zero then the relationship

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43.If beta of debt is zero, then the relationship between equity beta and asset beta is given by:A)equity beta= 1 + [(Beta of assets)/ (debt-equity ratio)]B)equity beta = (1 - Debt-equity ratio)(beta of assets)C)equity beta = (1 + Debt-equity ratio)(beta of assets)D)None of the aboveAnswer: CType: MediumPage: 457
44.Minimizing the weighted average cost of capital(WACC) is the same as:Type: MediumPage: 458
45.The after-tax weighted average cost of capital (WACC) is given by:C)]C)Type: MediumPage: 461
46.Given the following data for U&P Company:Debt (D)=\$100 million;Equity (E)=\$300 Million;rD= 6% ;rE=12% andTCCalculate the after-tax weighted average cost of capital (WACC):= 30%.
True/False QuestionsTF47.The firm's mix of long-term securities used to finance its assets is called the firm's capitalstructure.Type: MediumPage: 445
TF48.Value additivity does not hold good when assets are split up.Type: DifficultPage: 448
TF49.Modigliani and Miller Proposition I states that the market value of any firm is independentof its capital structureType: MediumPage: 449
TF50.According to Modigliani and Miller Proposition II, the rate of return required by the debtholders increases as the firm's debt-equity ratio increases.Type: DifficultPage: 453
Test Bank, Chapter 17188
TF51.Modigliani and Miller Proposition II states that the rate of return required by theshareholders increases as the firm's debt-equity ratio increases.Type: MediumPage: 453
TF52.According to Proposition II, the cost of equity increases as more debt is issued, but theweighted average cost of capital remains unchanged.Type: MediumPage: 453
TF53.Financial leverage increases the expected return and risk of the shareholder.Type: MediumPage: 453
TF54.Expected return on assets depends on several factors including the firm's capital structure.Type: MediumPage: 453
TF55.The beta of the firm is equal to the weighted average of the betas on its debt and equity.Type: MediumPage: 456
TF56.Since the expected rate of return on debt is less than the expected rate ofreturn on equity,the weighted average cost of capital declines as more debt is issued.Type: MediumPage: 458
Essay Questions57.Explain the concept of arbitrage.
Brealey/Myers/Allen, Principles of Corporate Finance, 8/e189

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