1.
Which of the followings states that the cost of equity is a positive linear function of capital structure?
a.The Capital Asset Pricing Model
b.M&M Proposition I
c.M&M Proposition II
d.The Law of One Price
2.
Which of the following is called the tax savings of the firm derived from the deductibility of interest expense?
a.Interest tax shield
b.Depreciable basis
c.Financing umbrella
d.Current yield
3.
Above the breakeven EBIT, increased financial leverage will __________ EPS, all else the same. Assume there are no taxes.
a.Increase
b.Decrease
c.Either increase or decrease
d.Increase EBIT but decrease
MGT 201 Spring Semester 2008 Quiz 02
4.
A firm has a DOL of 3.5 at Q units. What does this tell us about the firm?
a.If sales rise by 3.5% at the firm, then EBIT will rise by 1%
b.If EBIT rises by 3.5% at the firm, then EPS will rise by 1%
c.If EBIT rises by 1% at the firm, then EPS will rise by 3.5%
d.If sales rise by 1% at the firm, then EBIT will rise by 3.5%
5.
A firm has a DFL of 3.5 at X dollars. What does this tell us about the firm?
a.If sales rise by 3.5% at the firm, then EBIT will rise by 1%
b.If EBIT rises by 3.5% at the firm, then EPS will rise by 1%
c.If EBIT rises by 1% at the firm, then EPS will rise by 3.5%
d.If sales rise by 1% at the firm, then EBIT will rise by 3.5%
6.
Which of the following is an example of restructuring strategy?
a.Dividends are increased from Rs.1 to Rs.2 per share
b. new investment increases the firm’s business risk
c. New equity is issued and the proceeds repay debt
d. A new Board of Directors is elected to the firm
7.
The stability of a firm’s operating income is the focus of:
a.Financial leverage
b. Weighted-average cost of capital
c. Capital structure
d. Business risk
8.
The presence of which one of the following costs is not used as a major argument against the M&M arbitrage process?
a.Bankruptcy costs
b. Agency costs
c. Transactions costs
d. Insurance costs
9.
When a firm declares a special cash dividend of $1 per share, shareholders realize that the:
a.Annual dividend will be $4 per share
MGT 201 Spring Semester 2008 Quiz 02
b.Dividends are considered regular
c. Dividend is not likely to be repeated
d. Stock must be owned prior to the declaration date to receive the dividend
10.
What would you expect to happen to the price of a share of stock on the day it goes ex-dividend?
a.The price should increase by the amount of the dividend
b. The price should decrease by the amount of the dividend
c. The price should decrease by one-half the amount of the dividend
d. The price should remain constant
