1. Modigliani and Miller\'s Proposition I states that: (0.5) A. the market value

Question

1. Modigliani and Miller's Proposition I states that: (0.5) A. the market value of any firm is independent of its capital structure B. the market value of a firm's debt is independent of its capital structure C the market value of a firm's common stock is independent of its capital structure D. none of the options Answer e Generally, which of the following is true? (b- beta) (0.5) Answer . The company cost of capital, when the firm has both debt and equity financing, is called the: (0.5) A. B. C. D. cost of debt. cost of equity. the weighted average cost of capital (WACC). the return on equity (ROE). Answer For a levered firm: (0.5) A. as earnings before interest and taxes (EBIm) increases, earnings per share (EPS) increases by the sam B. as EBIT increases, EPS increases by a larger percentage. C. as EBIT increases, EPS decreases by the same percentage. D. as EBIT increases, EPS decreases by a larger percentage. Answer Capital structure is irrelevant if: (05) I) management incentives are not affected by capital structure ll) there is no bankruptcy cost; 111) there are no tax benefits to debt A. Ionly B. Il only C. Ill only D. I, I, and Ill Answer

Explanation / Answer

Question - 1 ..........Option - A

Question - 2 ..........Option - A ...bD < bA < bE

Beta is a measure of relative risk. we know risk of debt (D) is lower then (E) .....so asset (A) beta generally lies between these two beta values.

Question - 3 ............Option - C ..WACC

Question - 4 ...........Option - B

This is due to impact of Favorable leverage on the firm.

Question - 5 ............Option - C .......III only

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