1.Fixed cost sources of financing include both debt and common stock. True False
ID: 2718348 • Letter: 1
Question
1.Fixed cost sources of financing include both debt and common stock.
True
False
2.The desire to maintain high bond ratings will tend to increase the use of debt financing in a firm’s capital structure.
True
False
3. Financial risk is the basic risk inherent in the operations of a firm. It can be viewed as the volatility of a firm’s EBIT.
True
False
4. As a firm increases its use of debt financing, what is the impact upon the cost of equity?
The cost of equity decreases.
The cost of equity remains the same.
The cost of equity increases.
None of the above.
5.An investment banking firm has estimated the following after-tax cost of debt and cost of equity for Marquez Luxury Travel Tours.
Proportion of Debt After-tax Cost of Debt Cost of Equity
30% 3.5% 10.5%
40% 3.8% 11.3%
50% 5.0% 12.9%
60% 7.2% 14.5%
What is the cost of capital at Marquez’ optimal capital structure given the above information?
8.95%
8.40%
8.30%
8.15%
6. How does high business risk affect firm risk?
Higher business risk increases the volatility of capital structure.
Higher business risk increases the volatility of EBIT.
Higher business risk increases the volatility of financial costs.
Higher business risk increases the volatility of the firm’s asset structure.
Explanation / Answer
Solution:
Question 1
The answer to the above question is False.
Fixed cost in only related to Debt financing as, in case of common stock Dividends are paid which are decided on the discretion of the company and are not fixed.
Question 3
The answer to the above question is - False
There is no effect of finacial risk on firm's EBIT.
Question 4
The answer to the above question - cost of equity remains the same.
As there is no effect of debt raising on cost of equity.
Question 2
The answer to the above question is - True
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