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Summary FEM11118 Practice exam
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PRACTICE EXAM 1On the actual exam:
You are allowed to use a calculator.
You are not allowed to use a programmable calculator.
You are not allowed to use notes.
You are not allowed to use a dictionary.
Question 1.
Assume we are in the Modigliani-Miller world. There is an all-equity firm with a
current value of $100 million. The required return for shareholders is 9%. The
company plans to replace half of its equity with debt, with an interest rate of 6%. The
company does not pay taxes and does not suffer from other imperfections. What will
its shareholders demand for a return after the change in capital structure?
, Question 2.
According to the static tradeoff theory, should profitable firms have higher or lower
leverage, all else equal? Please provide a separate reasoning based on 1) taxes, 2)
financial distress, and 3) agency problems.
Profitable firms should have …………… leverage (fill in “higher” or “lower”)
1.
2.
3.
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