1. Read All Questions Carefully: Make sure you understand each question.
2. Time Management: You have a specific amount of time to complete the exam.
Keep an eye on the clock and pace yourself.
3. Allowed Materials: Only use materials that are explicitly allowed. Unauthorized
materials can lead to disqualification.
4. ANS Format: Follow the required format for your ANS. For example, multiple-
choice questions might need you to select the best ANS, while essay questions
require detailed responses.
5. Academic Integrity: Adhere to the university's honor code. Any form of cheating or
plagiarism is strictly prohibited.
6. Technical Requirements: Ensure your computer and internet connection are
stable. For online exams, you might need a webcam and microphone for proctoring
purposes.
7. Submission: Submit your ANS before the time expires. Late submissions might
not be accepted.
,1. Which of the following best describes the Modigliani-Miller
Proposition in a world without taxes?
A) Capital structure does not affect a firm's value
B) Debt financing always increases a firm's value
C) Equity financing is always less expensive than debt
D) A firm should always maximize debt to reduce tax liability
Correct ANS: A
Rationale: Modigliani and Miller argued that in a frictionless
market, the capital structure does not affect the value of the firm.
2. In a leveraged buyout (LBO), what is primarily used to
finance the acquisition?
A) Equity financing
B) Debt financing
C) Pure cash reserves
D) Convertible bonds
Correct ANS: B
Rationale: LBOs typically involve a significant amount of
debt that is secured against the cash flows and assets of the target
company.
,3. What is the primary purpose of a firm’s capital budgeting
process?
A) To determine the cost of capital
B) To evaluate long-term investment opportunities
C) To manage day-to-day cash flows
D) To engage in mergers and acquisitions
Correct ANS: B
Rationale: Capital budgeting focuses on evaluating long-term
project investments to assess their potential profitability.
4. Which of the following is a key disadvantage of debt
financing?
A) Ownership dilution
B) Interest payments increase taxable income
C) Increased cost of equity
D) Mandatory fixed payments regardless of cash flow
Correct ANS: D
Rationale: Debt financing entails mandatory interest
payments which must be made even if the company faces cash
flow issues.
, 5. The weighted average cost of capital (WACC) is primarily
used to:
A) Evaluate potential mergers
B) Estimate the expected return on equity
C) Determine the risk-free rate
D) Discount future cash flows of a firm
Correct ANS: D
Rationale: WACC represents the average rate of return a
company is expected to pay its security holders, and it is used as a
discount rate in evaluating investment opportunities.
Fill-in-the-Blank Questions
6. The __________ rate is the return expected on a project,
accounting for risk beyond the risk-free rate.
Correct ANS: required
Rationale: The required rate of return for a project considers
the risk premium associated with it.
7. An increase in a firm’s leverage increases its __________ risk
but reduces its __________ risk.
Correct ANS: financial; business
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