1) Assume that MM(Modigliani and Miller)\'s perfect capital markets conditions a

Question

1) Assume that MM(Modigliani and Miller)'s perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as “W”. You have $5000 of your own money to invest and you plan on buying “WO” stock. Using homemade leverage you borrow enough in your margin account so that the payoff of your margined purchase of WO stock will be the same as a $5000 investment in W stock. The number of shares of WO stock you purchased is closest to:

Select one:

a. 425

b. 1650

c. 2000

d. 825

2)

According to the MM model of capital structure, the present value of the tax shield is offset by potential ____, resulting in an optimal capital structure.

Select one:

a. bankruptcy costs

b. interest expense

c. operating costs

d. a and b

3)

MM Proposition I states that in a perfect capital market the total value of a firm is equal to the market value of the __________ generated by its assets.

Select one:

a. earnings after taxes

b. earnings after interest

c. cash flows after taxes

d. free cash flows

4)

Which of the following is correct.

Select one:

a. Capital structure affects both financial leverage and operating leverage

b. Cost structure affects both financial leverage and operating leverage

c. Capital structure affects financial leverage and cost structure affects operating leverage.

d. Capital structure affects operating leverage and cost structure affects financial leverage.

e. None of the above is correct.

Explanation / Answer

2)Option B
3)option D
4)option C.

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