Fundamentals of Corporate Finance, 12e (Ross)
Chapter 16 Financial Leverage and Capital Structure Policy
1) Which one of the statements is correct?
A) Capital structure has no effect on shareholder value.
B) The optimal capital structure occurs when the cost of equity is minimized.
C) The optimal capital structure maximizes shareholder value.
D) Shareholder value is maximized when WACC is also maximized.
E) Unlevered firms have more value than levered firms when firms are profitable.
2) A firm should lect the capital structure that:
A) produces the highest cost of capital.
B) maximizes the value of the firm.
C) minimizes taxes.
D) is fully unlevered.
E) equates the value of debt with the value of equity.
3) The value of a firm is maximized when the:
A) cost of equity is maximized.
B) tax rate equals the cost of capital.
C) levered cost of capital is maximized.
D) weighted average cost of capital is minimized.
E) debt-equity ratio is minimized.
4) The optimal capital structure has been achieved when the:
A) debt-equity ratio is equal to 1.
B) weight of equity is equal to the weight of debt.
C) cost of equity is maximized given a pretax cost of debt.
D) debt-equity ratio is such that the cost of debt exceeds the cost of equity.
E) debt-equity ratio results in the lowest possible weighted average cost of capital.
5) Assume you are reviewing a graph that plots earnings per share (EPS) against earnings before interest and taxes (EBIT). The steeper the slope of the plotted line the:
A) lower the impact of financial leverage.
B) lower the debt-equity ratio.
C) higher the tax rate.
D) greater the nsitivity of EPS to changes in EBIT.
E) lower the probability of a negative EPS.
6) You have computed the break-even point between a levered and an unlevered capital structure. Ignore taxes. At the break-even level, the:
A) company is earning just enough to pay for the cost of the debt.
B) company's earnings before interest and taxes are equal to zero.
C) earnings per share for the levered option are exactly double tho of the unlevered option.
D) advantages of leverage exceed the disadvantages of leverage.
E) company has a debt-equity ratio of .50.
7) Which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? Ignore taxes.
A) At the break-even point, there is no advantage to debt.
B) The earnings per share will equal zero when EBIT is zero for a levered firm.
C) The advantages of leverage are inverly related to the level of EBIT.
D) The u of leverage at any level of EBIT increas the EPS.
E) EPS are more nsitive to changes in EBIT when a firm is unlevered.
8) Jessica invested in QRT stock when the company was unlevered. Since then, QRT has changed its capital structure and now has a debt-equity ratio of .36. To unlever her position, Jessica needs to:
A) borrow some money and purcha additional shares of QRT stock.
B) maintain her current equity position as the debt of the firm does not affect her personally.
C) ll 36 percent of her shares of QRT stock and hold the proceeds in cash.
D) ll 36 percent of her shares of QRT stock and loan out the sale proceeds.
E) create a personal debt-equity ratio of .36.
9) Which one of the following makes the capital structure of a company irrelevant?
A) Taxes
B) Interest tax shield
C) 100 percent dividend payout ratio
D) Debt-equity ratio that is greater than 0 but less than 1
E) Homemade leverage
10) Homemade leverage is:
A) the incurrence of debt by a corporation in order to pay dividends to shareholders.
B) the exclusive u of debt to fund a corporate expansion project.
C) the u of personal borrowing to alter an individual's exposure to financial leverage.
D) best defined as an increa in a company's debt level.
E) the term ud to describe the capital structure of a levered firm.
11) The concept of homemade leverage is most associated with:
A) M&M Proposition I with no tax.
B) M&M Proposition II with no tax.
C) M&M Proposition I with tax.
D) M&M Proposition II with tax.
E) the static theory proposition.
12) Which one of the following statements is correct in relation to M&M Proposition II, without taxes?
