1. Question

   Modigliani and Miller's Proposition I states that the market value of any firm is independent of its capital structure.

   1. True
   2. False
2. Question

   Financial leverage increases the expected return and risk of the shareholder.

   1. True
   2. False
3. Question

   If an investor buys a portion (X) of both the debt and equity of a levered firm, then his/her payoff is

   1. (X) (profits).

   2. (X) (interest).

   3. (X) (profits interest).

   4. (X) (profits interest + depreciation).

   5. None of the choices.

4. Question

   SQ Inc. is an all-equity firm that has an expected return of 17%. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent, what is the expected return on the common stock after refinancing?(Ignore taxes.)

   1. 23.32%

   2. 20.67%

   3. 17.00%

   4. 15.85%

   5. 12.33%

5. Question

   A firm has a debt-to-equity ratio of 1.80. Its cost of debt is 9 percent. Its overall cost of capital is 12.2 percent. What is its cost of equity if there are no taxes?

   1. 10.15%

   2. 12.82%

   3. 13.48%

   4. 15.11%

   5. 17.96%