Group Presentation 4: Capital Structure 1

Question 1

A perfect capital market is a market in which:

Answer 1

A. Securities are not fairly priced
B. There is a brokerage cost
C. No tax consequences 
D. There is a bankruptcy cost
Ans: C

Question 2

Which component of capital structure determines the financial risk?

Answer 2

A. Equity
B. Retained earning
C. Debt
Ans: C

Question 3

A firm’s_ ratio is the fraction of the firm’s total value that corresponds to debt.

Answer 3

A. Debt-to-equity
B. Equity-to-debt
C. Debt-to-value
D. Liability
Ans: C

Question 4

Investment cash flows are independent of financing choices in a _.

Answer 4

A. market with fractions
B. perfect capital markets
C. setting with fractions in investment returns
D. firms with leverage
Ans: B

Question 5

A firm requires an investment of $18,000 and will return $25,000 after one year. If the firm borrows $10,000 at 6%, what is the return on levered equity?

Answer 5

A. 80%
B. 96%
C. 64%
D. 112%
Ans: 80%

Question 6

Equity in a firm with debt is called unlevered equity.

Answer 6

False

Question 7

Which of the following does a firm consider in the choice of securities issued?

Answer 7

A. The tax consequences of the chosen security
B. The transactions costs of the chosen security
C. Whether the chosen security will have a fair price in the market
D. All of the above are considered
Ans: D

Question 8

Below are the models to get the return of equity except:

Answer 8

A. Dividend Discount Model
B. Capital Asset Model (CAPM)
C. Capital Intensity
D. Security Market Line (SML)
Ans: C