,1. Which of the following best defines the Modigliani-Miller
theorem concerning capital structure irrelevance?
- A. It suggests that in a world with no taxes or bankruptcy costs,
leverage does not affect the firm value.
- B. It states that high leverage always increases firm value.
- C. It proposes that only debt increases firm value.
- D. It implies stock pricing is irrelevant to capital structure.
Answer: A.
Rationale: Modigliani-Miller theorem argues that in perfect
markets without taxes or bankruptcy costs, the capital structure
doesn't impact the overall value of the firm.
2. A firm's weighted average cost of capital (WACC) is critically
important for which of the following reasons?
- A. It determines the firm's tax liability.
- B. It sets the minimum return required for capital budgeting
projects.
- C. It is used to assess operational effectiveness.
- D. It dictates the firm's cash flow strategies.
, Answer: B.
Rationale: WACC determines the minimum average return
required for a firm to satisfy its owners and creditors, influencing
investment decisions.
3. Which financial strategy focuses on using derivatives to manage
interest rate risks?
- A. Asset management
- B. Capital budgeting
- C. Hedging
- D. Dividend policy
Answer: C.
Rationale: Hedging involves using financial instruments like
derivatives to mitigate risks associated with fluctuations in interest
rates.
### Fill-in-the-Blank Questions
4. In the context of Real Options Analysis, the term _____ refers
to the flexibility to decide on delays in the investment until
additional information is available.
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