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FIN 701 - Module 6 (Capital Structure) Exam Questions and Answers $10.49   Add to cart

Exam (elaborations)

FIN 701 - Module 6 (Capital Structure) Exam Questions and Answers

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  • Course
  • FIN701
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  • FIN701

Business Risk - Answer-The equity risk that comes from the nature of the firm' operating activities and directly related to the firm's operations. True - Answer-T/F: As the firm takes on more and more debt, the return on equity (ROE) increases. Financial Risk - Answer-The extra risk to shareh...

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  • August 23, 2024
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  • 2024/2025
  • Exam (elaborations)
  • Questions & answers
  • FIN701
  • FIN701
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FIN 701 - Module 6 (Capital Structure)
Exam Questions and Answers
Business Risk - Answer-The equity risk that comes from the nature of the firm' operating
activities and directly related to the firm's operations.

True - Answer-T/F: As the firm takes on more and more debt, the return on equity
(ROE) increases.

Financial Risk - Answer-The extra risk to shareholders that comes from debt
financing.

Lower - Answer-We can see at _____ levels of EBIT, debt is a disadvantage, as the
burden of paying interest on the debt negatively affects EPS. (Lower or Higher?)

False - Answer-T/F: If we expect EBIT to be greater than the break-even point, then
leverage is NOT beneficial to our stockholders.

False - Answer-T/F: If we expect EBIT to be below the break-even point, then leverage
(debt) is beneficial to the stockholders

Less - Answer-At any EBIT below the break-even point, the EPS for the levered will be
____ than the EPS for the unlevered firm. (Less or more?)

More - Answer-At any EBIT above the break-even point, the EPS for the levered firm
will be ____ than the EPS for the unlevered firm. (Less or More?)

Increases - Answer-The reduction in taxes ____ the cash flow of the firm. (Increases or
Decreases?)

Interest tax shield - Answer-This is the tax savings arising from the tax deductibility of
interest. It is the key benefit of borrowing over issuing equity.

True - Answer-T/F: All else equal, a lower tax rate reduces the value of the tax shield.

M&M Proposition II - Answer-Which proposition states that a firm's cost of equity capital
is directly and proportionally related to the firm's capital structure?

False - Answer-T/F: If the firm has no debt (the firm is unlevered), there is a benefit from
the interest tax shield

Increases - Answer-As the D/E ratio _____, the probability of bankruptcy increases.
(Decreases or increases?)

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