Which of the following is tax deductible?

• A) Dividend on common stocks
• B) Dividend on preferred shares
• C) Capital gain on common stocks
• D) Coupon payments on bonds

Keeping other factors constant, if earnings before interest and taxes and interest expense of a company are same, then:

• A) Earning per share will increase but return on equity will drop
• B) Earning per share and Return on equity will be maximum as net income is zero
• C) Earning per share will increase as net income is zero
• D) Earning per share and Return on equity cannot be determined as net income is zero

According to the proposition I (with taxes) of the Modigliani & Miller model, the value of a levered firm is:

• A) Equal to an un-levered firm
• B) Nothing of the given options is correct
• C) Less than that of an un-levered firm
• D) Greater than that of an un-levered firm

An un-levered firm introduces debt to its capital structure by repurchasing a certain amount of outstanding shares, by keeping Earnings before interest and taxes constant:

• A) The earning per share will rise with addition of debt
• B) All of the given options are correct
• C) The return on equity will rise with addition of debt
• D) Net income will drop with the addition of debt

Normally, with the addition of financial leverage in the capital structure of an un-levered firm, one of the following changes may occur:

• A) Return of shareholders may increase
• B) Earning per share and Return on equity may increase
• C) Risk of shareholders may increase
• D) All of the given options are correct

According to proposition I (ignoring taxes) of the Modigliani & Miller model, when a firm uses different combinations of debt and equity in its capital structure:

• A) Cost of equity drops with addition of debt in capital structure
• B) Overall WACC remains same regardless of costs of its components
• C) Overall WACC of a firm starts falling
• D) Cost of debt and equity remain same

A firm has a debt to equity ratio of 60:40. The after-tax cost of debt and cost of equity is 5% and 9% respectively. The weighted average cost of capital of the firm is:

• A) 5.6%
• B) 4.6%
• C) 6.6%
• D) 7.6%

Which of the following statements is correct regarding WACC of an un-geared firm?

• A) Cost of equity and cost of capital are same
• B) Cost of debt is same as cost of capital
• C) Cost of equity is less than cost of capital
• D) Cost of debt is at optimal level

Which of the following approaches is used to estimate the cost of equity capital of a project based on projects similar to line of business?

• A) Capital Budgeting
• B) Optimal Capital Structure
• C) Pure Play
• D) Weighted Average Cost of Capital

Which of the following will precede “FEEDBACK” in the financial planning process?

• A) Taking corrective measures
• B) Choosing strategy
• C) Comparing budgeted and actual results
• D) Implementation of the plan

If the risk level of a new project is different from the existing projects of a company, then:

• A) WACC is estimated using systematic risk of new project
• B) Equity beta of existing projects is used to estimate WACC
• C) WACC of existing projects should be used
• D) Systematic risk of existing projects should be considered

If a company’s after-tax cost of debt is 6% at a corporate tax rate of 25%, then what will be its before-tax cost of debt?

• A) 8.5%
• B) 8%
• C) 9%
• D) 7.5%

According to the proposition I (ignoring taxes) of the Modigliani & Miller model, the value of a firm does not change because

• A) WACC of the firm remains constant
• B) Operating income of the firm remains constant
• C) All of the given options are correct
• D) The amount of capital of the firm remains fixed

With the addition of debt in capital structure of an un-levered firm, the cost of equity capital of the firm:

• A) Cannot be determined
• B) Decreases
• C) Increases
• D) Remains the same

According to proposition II of the Modigliani & Miller model, the cost of equity of a levered firm is a function of:

• A) Bankruptcy risk and inflation risk
• B) Business risk and financial risk
• C) Liquidity risk and interest rate risk
• D) Operational risk and credit risk

If the debt to equity ratio of a company is 1.2, then equity to the total value of the company will be closest to:

• A) 75%
• B) 65%
• C) 45%
• D) 80%

A new project of an un-levered firm belongs to a different industry that has equity beta of 2.2 and debt to equity ratio of 60:40. The equity beta of the new project of the un-levered firm will be:

• A) None of the given options is correct
• B) Less than the equity beta of the industry
• C) Equal to the equity beta of the industry
• D) More than the equity beta of the industry

According to the proposition I (with taxes) of the Modigliani & Miller model, the value of a levered firm is equal to:

• A) Value of un-levered firm * tax on debt
• B) Value of un-levered firm - tax on debt
• C) Value of un-levered firm + tax on debt
• D) Value of un-levered firm / tax on debt

If a firm’s cost of debt is 8 percent while the after-tax cost of debt is 6 percent, the corporate tax rate will be:

• A) 30%
• B) 25%
• C) 20%
• D) 35%

Which of the following statements is true regarding Weighted Average Cost of Capital (WACC)?

• A) WACC of a levered firm is lesser than that of an un-levered firm
• B) An Un-levered firm has zero WACC
• C) WACC of a levered firm is greater than that of an un-levered firm
• D) WACC of a levered firm is equal to that of an un-levered firm