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

The optimal capital structure minimizes WACC, which in turn maximizes the market value of the firm.

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

In perfect capital markets with no taxes, MM proved that firm value is determined by its assets and earnings, not by how it is financed.

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

WACC blends the after-tax cost of debt and the cost of equity, weighted by their proportions in the firm's capital structure.

Question 4

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

Accepted Answer

Dividend policy has no effect on firm value

Answer

MM argued that in perfect markets investors can replicate any dividend policy themselves, so dividend decisions do not affect firm value.

Question 5

Financial leverage refers to:

Accepted Answer

Using borrowed funds to potentially amplify returns to equity holders

Answer

Financial leverage involves using debt capital to increase potential returns to equity holders, while simultaneously increasing financial risk.

Bcom Bachelor of Commerce Practice Test