Fundamentals of Financial Management, Third Edition

OBJECTIVE-TYPE QUESTIONS

1. Mark true or false.
   1. Financial leverage and trading on equity carry different meanings.
   2. The M-M hypothesis indicates that in presence of taxes, financial leverage raises the value of corporate wealth.
   3. Financial leverage reduces the eps if the interest rate is lower than the rate of return on investment.
   4. Optimal capital structure exists when WACC is minimum.
   5. Under the pecking order hypothesis, firms prefer to use internally generated funds.
2. Choose the most suitable answer:
   1. M-M theory suggests that changing leverage ratio does not influence the value of a firm because of:
      1. the arbitrage process
      2. no change in the WACC
      3. both of the above
   2. If WACC, according to M-M hypothesis, remains unchanged with leverage, it is because: ...