Which of the following is generally TRUE about a firm's cost of debt? a) It is equal to the yield to maturity on the firm's bonds. b) It is greater than the cost of equity. c) It normally cannot be observed, directly or indirectly, in the marketplace. d) It is equal to the coupon rate on the firm's bonds According to the Capital Asset Pricing Model (CAPM), a stock with an actual return that lies below the security market line (SML) _____ a) has lower systematic risk than the overall market b) has lower risk than warranted based on the realized rate of return c) has yielded a higher return than expected for the level of systematic risk assumed d) has yielded a lower return than expected for the level of systematic risk assumed risk assumed The _____ shows that the weighted average cost of capital (WACC or R_WACC) is independent of its capital structure. a) Modigliani and Miller (M&M) Proposition I without taxes and without bankruptcy costs b) Modigliani and Miller (M&M) Proposition II without taxes and without bankruptcy costs c) Capital Asset Pricing Model d) Efficient Markets Hypothesis Which of the following correctly completes the following: Modigliani and Miller (M&M) Proposition I with corporate taxes but without bankruptcy costs shows _____. a) the value of an unlevered firm exceeds the value of a levered firm by the present value of the interest tax shield b) a levered firm can increase its value by reducing debt c) there is a linear relation between the amount of debt in a levered firm and its value d) the value of a levered firm is equal to its aftertax earnings before interest and taxes (EBIT) discounted by the unlevered cost of capital The optimal capital has been achieved when the _____ a) Debt to equity ratio is equal to one b) Cost of equity is maximized given a pre-tax cost of debt c) Debt to equity ratio is such that the cost of debt exceeds the cost of equity d) Debt to equity ratio results in the lowest possible weighted average cost of capital _____ states that a firm borrows up to the point where the benefit of the interest (or debt) tax shield from an extra dollar of debt is just equal to the expense of the resulting increase in bankruptcy costs. a) The Modigliani and Miller (M&M) Proposition I without taxes and without bankruptcy costs b) The Modigliani and Miller (M&M) Proposition II without taxes and without bankruptcy costs c) The static theory (or trade-off theory) of capital structure d) The pecking-order theory
