If debt to equity ratio of a company is 1.7, then it means debt is equal to____________ and equity is equal to________________.

• A) 0.7; 1
• B) 1; 0.7
• C) 1; 1.7
• D) 1.7; 1

According to the proposition I & II (with taxes) of the Modigliani & Miller model, which of the following statements is INCORRECT?

• A) Debt financing carries financial advantage
• B) Value of a levered firm is greater than that of an un-levered firm
• C) WACC of a levered firm is less than that of an un-levered firm
• D) None of the given options is incorrect

According to proposition II of Modigliani & Miller model, the required rate of return (r) on equity of a levered firm can be calculated by:

• A) r EQUITY = r ASSETS + Debt*Equity (r ASSETS + r DEBT )
• B) r EQUITY = r ASSETS - Debt/Equity (r ASSETS + r DEBT )
• C) r EQUITY = r ASSETS + Debt/Equity (r ASSETS - r DEBT )
• D) r EQUITY = r ASSETS - Debt/Equity (r ASSETS - r DEBT )

A firm has debt to equity ratio of 0.6. It represents the firm has:

• A) 37.5% debt and 62.5% equity
• B) 27.5% debt and 72.5% equity
• C) 22.5% debt and 77.5% equity
• D) 32.5% debt and 67.5% equity

(Required rate of Return on an asset – Required rate of Return on debt) x Debt/Equity is a component of cost of equity that represents:

• A) Systematic risk
• B) Financial risk
• C) Business risk
• D) Operational risk

According to proposition II of the Modigliani & Miller model, the required rate of return on assets of an un-levered firm is:

• A) All of the above options are correct
• B) Less than return on equity
• C) Greater than return on equity
• D) Equal to return on equity

Proposition I (Ignoring tax) of Modigliani & Miller theorem states:

• A) Value of firm is positive linear function of leverage
• B) Value of firm is independent of its capital structure
• C) Value of firm is decreasing function of its capital structure
• D) Value of firm is an increasing function of capital structure

Which of the following statements is NOT true according to the proposition I (ignoring taxes) of the Modigliani & Miller model?

• A) WACC of a firm does not depend on debt to equity mix
• B) Value of a firm is independent of its capital structure
• C) Cost of debt and equity do not change with the change in debt to equity ratio of a firm
• D) Operating income of a firm is independent of its capital structure

If a firm’s cost of debt is 13 percent and the corporate tax rate is 20 percent, then the after-tax cost of debt will be:

• A) 9.4%
• B) 10.4%
• C) 8.4%
• D) 11.4%

Which of the following is the principal advantage of high debt financing?

• A) Tax savings
• B) Low bankruptcy costs
• C) Low financial leverage
• D) Minimum financial risk

What will be the cost of equity for a company having beta of 2, if the market risk premium is 7% and the risk-free rate is 8%?

• A) 25%
• B) 18%
• C) 20%
• D) 22%

An un-geared beta refers to the beta of a firm that is:

• A) Fully Equity financed
• B) 60% Equity and 40% Debt financed
• C) 50% Equity and 50% Debt financed
• D) Fully Debt financed

If the debt to equity ratio of a company is 1.5, then the total value of the firm will be:

• A) 1
• B) 2
• C) 1.5
• D) 2.5

What will be the cost of equity for a company having a beta of 1.5, if the market risk premium is 6% and the risk-free rate is 4%?

• A) 8%
• B) 13%
• C) 14%
• D) 9%

The positive effect of financial leverage on fixed capital of an un-levered firm can be seen when:

• A) Fixed cost is high but variable cost is minimum
• B) Earnings before interest and taxes are high
• C) Financial risk is high
• D) Operating leverage is high

If a firm’s cost of debt is 9 percent and the corporate tax rate is 30 percent, then the after-tax cost of debt will be:

• A) 7.2%
• B) 5.85%
• C) 6.75%
• D) 6.3%

A firm has a debt to equity ratio of 70:30. The after-tax cost of debt and cost of equity is 6% and 12% respectively. The weighted average cost of capital of the firm is:

• A) 8.4%
• B) 9.24%
• C) 7.8%
• D) 9.8%

According to proposition II of Modigliani & Miller model, the cost of equity of an un-levered firm:

• A) Decreases with the increase in return on assets of the firm
• B) Increases in proportion to changes in capital structure of the firm
• C) Is equal to overall cost of capital of the firm
• D) Decreases in proportion to changes in capital structure of the firm

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

• A) Changes in cost of debt and equity adjust with change in debt to equity ratio
• B) Changes in cost of debt and equity adjusts with fixed debt to equity ratio
• C) Debt to equity ratio remains constant regardless of associated costs
• D) Debt to equity ratio varies but associated costs remain constant

According to propositions I and II of the Modigliani & Miller model, which of the following is a positive linear function of a firm’s capital structure?

• A) Debt to equity ratio
• B) Cost of equity capital
• C) Cost of debt capital
• D) Weighted average cost of capital