[nimmin]

1. The company cost of capital is the return that is expected on a portfolio of the company's:
a) existing securities
b) equity securities
c) debt securities
d) proposed securities.

2. Which of the following is not a cost to the firm of increasing debt financing?
a) Investors will demand a higher interest rate on debt.
b) The risk to common stockholders will increase.
c) Stockholders will demand a higher return.
d) The cost of common equity will decrease.

3. What will be the effect of using book value of debt in WACC decisions if interest rates have decreased substantially since a firm's long-term bonds were issued?
a) The debt-to-value ratio will be overstated.
b) The debt-to-value ratio will be understated.
c) There will be no effect on WACC decisions.
d) It cannot be determined without knowing interest rates.

4. When asked about key factors of debt policy, financial managers commonly mention:
a) the tax advantage of debt.
b) the importance of maintaining their credit rating
c) financial slack.
d) all of these.

5. The optimal capital structure is met when:
a) additional borrowing results in lower financial distress costs.
b) additional borrowing is offset by the interest tax shield.
c) the tax savings from additional leverage are offset by the costs of distress.
d) the present value of the tax shield is greater than the value of an all-equity-financed firm.

6. Although the value of an additional interest tax shield may be positive, firms may restrict borrowing if:
a) the returns on the project are too high.
b) their asset base is largely intangible
c) their asset beta is zero.
d) the borrowing increases their WACC.

[Curlyben]

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