Bcom Bachelor of Commerce Corporate Finance & Financial Management 2

Question 1

The optimal capital structure is the combination of debt and equity that:

Accepted Answer

Minimizes the Weighted Average Cost of Capital (WACC)

Answer

Uses the maximum proportion of debt

Answer

Uses only equity with no debt

Answer

Maximizes the debt-to-equity ratio

Question 2

According to the Modigliani-Miller theorem in a world without taxes, firm value is:

Accepted Answer

Independent of the firm's capital structure

Answer

Maximized by using maximum debt

Answer

Maximized by using zero debt

Answer

Determined entirely by dividend policy

Question 3

The Weighted Average Cost of Capital (WACC) is defined as:

Accepted Answer

The weighted average of the after-tax costs of all capital sources

Answer

The average interest rate paid on all outstanding debt

Answer

The required rate of return on equity only

Answer

The risk-free rate plus the equity risk premium

Question 4

Under Modigliani-Miller's dividend irrelevance theory, in perfect capital markets:

Accepted Answer

Dividend policy has no effect on firm value

Answer

Paying higher dividends always increases share price

Answer

Cutting dividends always decreases firm value

Answer

Investors always prefer dividends over capital gains

Question 5

Financial leverage refers to:

Accepted Answer

Using borrowed funds to potentially amplify returns to equity holders

Answer

The ratio of fixed operating costs to variable operating costs

Answer

Total assets divided by shareholders' equity only

Answer

Using additional equity to reduce debt obligations

Question 6

The Dividend Payout Ratio is calculated as:

Accepted Answer

Dividends per share divided by earnings per share

Answer

Net income divided by total dividends paid

Answer

Total dividends divided by total assets

Answer

Retained earnings divided by net income

Question 7

The Pecking Order Theory of capital structure suggests that firms prefer to raise capital in which sequence?

Accepted Answer

Retained earnings, then debt, then new equity

Answer

New equity, then debt, then retained earnings

Answer

Debt, then new equity, then retained earnings

Answer

New equity, then retained earnings, then debt