Question1: Which of the following events is likely to encourage a company to raise its target debt ratio?
[A] An increase in the corporate tax rate.
[B] An increase in the personal tax rate.
[C] An increase in the company operating leverage.
[D] Options A & C are correct.
[E] All of the statements above are correct.
Question2: Determine which of the following statements is false? As a firm increases its operating leverage for a given quantity of output, this
[A] increases the standard deviation of its EBIT.
[B] increases the variability in earnings per share.
[C] changes its operating cost structure.
[D] increases its business risk.
[E] decreases its financial leverage.
Question3: Company A & B have the same total assets, operating income (EBIT), tax rate, & business risk. Company A, however, has a much higher debt ratio than Company B. Company A's basic earning power (BEP) exceeds its cost of debt financing (rd). Which of the following statements is most correct?
[A] Company A has a higher return on assets (ROA) than Company B.
[B] Company A has a higher times interest earned (TIE) ratio than Company B.
[C] Company A has a higher return on equity (ROE) than Company B, & its risk, as measured by the standard deviation of ROE, is also higher than Company B.
[D] Statements b & c are correct.
[E] All of the statements above are correct.
Question4: Determine which of the following statements concerning capital structure theory is false?
[A] Under MM with zero taxes, financial leverage has no effect on firm value.
[B] Under MM with corporate taxes, the value of the levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt.
[C] The major contribution of Miller theory is that it demonstrates that personal taxes decrease the value of corporate debt.
[D] Under MM with corporate taxes, the effect of business risk is automatically incorporated because rsL is a function of rsU.
[E] Under MM with corporate taxes, rs raise with leverage, & this increase is just sufficient to offset the tax benefits of debt financing.
Question5: Which of the following statements is most correct?
[A] Since debt financing raises the firm's financial risk, raising a company debt ratio will always increase the company WACC.
[B] Since debt financing is cheaper than equity financing, raising a company debt ratio will always reduce the company WACC.
[C] Increasing a company debt ratio will typically reduce the marginal cost of both debt & equity financing; however, it still may raise the company WACC.
[D] Statements A & C are correct.
[E] None of the statements above is correct.