CPFM Corporate Finance Structure 2

Question 1

A firm's weighted average cost of capital (WACC) will most likely decrease when it does which of the following?

Accepted Answer

Adds a modest amount of tax-deductible debt to an all-equity structure

Answer

Replaces low-cost debt with new equity

Answer

Increases its corporate tax rate to zero

Answer

Issues equity to retire all outstanding debt

Question 2

Under Modigliani-Miller with corporate taxes, the value of a levered firm equals the value of an unlearvered firm plus what?

Accepted Answer

The present value of the debt tax shield

Answer

The market value of equity

Answer

The firm's retained earnings

Answer

The cost of financial distress

Question 3

Which capital component typically carries the highest required rate of return for investors?

Accepted Answer

Common equity

Answer

Senior secured debt

Answer

Subordinated debt

Answer

Preferred stock

Question 4

A company with highly volatile, cyclical cash flows should generally maintain what type of capital structure?

Accepted Answer

A more conservative, equity-heavy structure

Answer

A high proportion of fixed-rate debt

Answer

Maximum leverage to amplify returns

Answer

Entirely short-term debt

Question 5

The 'pecking order theory' of capital structure predicts that firms prefer to finance investments first with which source?

Accepted Answer

Internal funds (retained earnings)

Answer

New common equity

Answer

External debt

Answer

Preferred stock

Question 6

Financial leverage refers to the use of what to finance a firm's assets?

Accepted Answer

Fixed-cost financing such as debt

Answer

Operating fixed costs like rent

Answer

Equity issued to insiders

Answer

Variable production costs

Question 7

Which ratio best measures the proportion of a company's capital that comes from creditors?

Accepted Answer

Debt-to-total-capital ratio

Answer

Current ratio

Answer

Gross margin

Answer

Inventory turnover