1. which is INCORRECT about a perfect capital market? ( Single Choice)

Answer 1: there is no financial frictions such as corporate tax

Answer 2: capital structure does not matter for firm value

Answer 3: wacc remains constant no matter how leverage changes

Answer 4: equity risk remains constant no matter how leverage changes

2. which of the following is NOT a financial friction that a perfect capital market is free of? ( Single Choice)

Answer 1: transaction costs

Answer 2: individuals are at a disadvantage in borrowing and lending relative to companies

Answer 3: insiders know more than outsiders

Answer 4: equity holders have different incentives with bond holders

Answer 5: cost of debt

3. in a perfect capital market, a 100% equity financed firm has an unlevered cost of equity of 10% and value of $10m. now it raises $5m debt and uses it to buy back shares from the market. if cost of debt is 5%, what is its new levered cost of equity? ( Single Choice)

Answer 1: 15%

Answer 2: 10%

Answer 3: 5%

Answer 4: 7.5%

4. in a perfect capital market, a 100% equity financed firm has an unlevered cost of equity of 10% and value of $10m. now it raises $5m debt and uses it to buy back shares from the market. if cost of debt is 5%, what is its new WACC? ( Single Choice)

Answer 1: 10%

Answer 2: 15%

Answer 3: 5%

Answer 4: 7.5%

5. a firm maintains a constant level of debt of $10m. If the tax rate is 40%, what is the additional firm valued added by the debt if cost of debt is 5%? ( Single Choice)

Answer 1: 4m

Answer 2: 0.5m

Answer 3: 0.2m