Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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1.
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Financial risk may be defined as: a. | The risk that the firm will default on its
debt | c. | The volatility
of the company's earnings from financial securities | b. | The increased
volatility of the returns available to equity as the level of debt increases
| d. | The volatility
of the firm's share price | | | | |
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2.
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Modigiani and Miller's proposition 1 states: a. | A firm's average
cost of capital is completely independent of its capital structure | c. | The volatility of the company's earnings from financial
securities | b. | The increased volatility of the returns available to equity as
the level of debt increases | d. | The volatility
of the firm's share price | | | | |
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3.
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Modigiani and Miller's proposition 1 states: a. | A firm's average
cost of capital is completely independent of its capital structure | c. | A firm's average cost of capital rises with decreases in its
capital structure | b. | A firm's average cost of capital rises with increases in its
capital structure | d. | A firm's average
cost of capital rises is directkly related to the cost of debt | | | | |
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4.
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A and
B are two firms of identical business risk with £200000 of earnings each, and A is financed
solely by 1million equity shares but B is financed by 1 million shares and £1m of 5% debt.
A has an equity cost of capital of 10 per cent. What is the market value per share of equity in
B? a. |
£2.00 | c. | £2.50 | b. | £1.50 | d. | £1.00 | | | | |
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5.
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A and
B are two firms of identical business risk with £200000 of earnings each, and A is financed
solely by 1million equity shares but B is financed by 1 million shares and £100000 of 5%
debt. A has an equity cost of capital of 10 per cent. What is the weighted average cost
of capital in B?
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