Corporate finance midterm
ADM 3350 M
Winter 2010
CORPORATE FINANCE
MIDTERM EXAMINATION – February 10th, 2010
Professor: Kaouthar LAJILI, PhD., CGA Duration: 1 hour and 30 minutes
Part I
15
Part II
35
TOTAL
50
NAME: __________________________________________
STUDENT #: ________________________
PART I: Multiple Choice Questions
(15 points)
Please circle the correct answer
1. In an EPS-EBI graphical relationship, the slope of the debt ray is steeper than the equity ray. The debt ray has a lower intercept because: A) more shares are outstanding for the same level of EBI. B) the break-even point is higher with debt. C) a fixed interest charge must be paid even at low earnings. D) the amount of interest per share has only a positive effect on the intercept. E) the higher the interest rate the greater the slope.
2. A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm is considering a new capital structure with 60% debt. The interest rate on the debt would be 8%. Assuming there are no taxes or other imperfections, its cost of equity capital with the new capital structure would be: A) 9%. B) 14%. C) 13%. D) 10%. E) none of the above.
3. The increase in risk to equityholders when financial leverage is introduced is evidenced by: A) higher EPS as EBIT increases. B) a higher variability of EPS with debt than all equity. C) increased use of homemade leverage. D) equivalence value between levered and unlevered firms in the presence of taxes. E) only two of the above.
4. A key assumption of MMs Proposition I (no taxes) is: A) that financial leverage increases risk. B) that individuals can borrow on their own account at rates less than the firm. C) that individuals must be able to borrow on their own account at rates equal to the firm. D) managers are acting to
Winter 2010
CORPORATE FINANCE
MIDTERM EXAMINATION – February 10th, 2010
Professor: Kaouthar LAJILI, PhD., CGA Duration: 1 hour and 30 minutes
Part I
15
Part II
35
TOTAL
50
NAME: __________________________________________
STUDENT #: ________________________
PART I: Multiple Choice Questions
(15 points)
Please circle the correct answer
1. In an EPS-EBI graphical relationship, the slope of the debt ray is steeper than the equity ray. The debt ray has a lower intercept because: A) more shares are outstanding for the same level of EBI. B) the break-even point is higher with debt. C) a fixed interest charge must be paid even at low earnings. D) the amount of interest per share has only a positive effect on the intercept. E) the higher the interest rate the greater the slope.
2. A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm is considering a new capital structure with 60% debt. The interest rate on the debt would be 8%. Assuming there are no taxes or other imperfections, its cost of equity capital with the new capital structure would be: A) 9%. B) 14%. C) 13%. D) 10%. E) none of the above.
3. The increase in risk to equityholders when financial leverage is introduced is evidenced by: A) higher EPS as EBIT increases. B) a higher variability of EPS with debt than all equity. C) increased use of homemade leverage. D) equivalence value between levered and unlevered firms in the presence of taxes. E) only two of the above.
4. A key assumption of MMs Proposition I (no taxes) is: A) that financial leverage increases risk. B) that individuals can borrow on their own account at rates less than the firm. C) that individuals must be able to borrow on their own account at rates equal to the firm. D) managers are acting to