Multiple Choice Question 49 Cadmium Electronics Inc. currently has a capital structure that is 40% debt and 60% equity. If the firm’s cost of equity is 12%, the cost of debt is 8%, and the risk-free rate is 3%, what is the appropriate WACC? [removed] 9.2% [removed] 8.4% [removed] 9.6% [removed] 10.4% Multiple Choice Question 50 Gangland Water Guns, Inc. has a debt-to-equity ratio of 0.5. If the firm’s cost of debt is 7% and its cost of equity is 13%, what is the appropriate WACC? [removed] 9% [removed] 10% [removed] 11% [removed] None of the above. Multiple Choice Question 66 The use of debt financing [removed] causes a manager to take on riskier projects in order to make interest payments. [removed] limits the ability of managers to waste stockholders money. [removed] allows managers to make discretionary interest payments. [removed] is more expensive than issuing equity due to the use of covenants. Multiple Choice Question 69 The use of debt financing [removed] increases agency costs between the stockholders and management by limiting the amount of risk the managers take. [removed] increases agency costs since managers prefer to keep more retained earnings rather than paying dividend. [removed] both increases agency costs between the stockholders and management by limiting the amount of risk the managers take and increases agency costs since managers prefer to keep more retained earnings rather than paying dividend. [removed] reduces agency costs between the stockholders and management by increasing the amount of risk the managers take. Multiple Choice Question 70 The asset substitution problem occurs when [removed] managers substitute less risky assets for riskier ones to the detriment of equity holders. [removed] managers substitute more risky assets for less risky ones to the detriment of bondholders. [removed] managers substitute less risky assets for more risky ones to the detriment of bondholders. [removed] managers substitute more risky assets for less risky ones to the detriment of equity holders. Multiple Choice Question 72 Packman Corporation has a reported EBIT of $500, which is expected to remain constant in perpetuity. The firm borrows $2,000, and its coupon rate is 8%. If the company’s marginal tax rate is 30% and its average tax rate is 20%, what are its after-tax earnings? [removed] $238 [removed] $272 [removed] $259 [removed] None of the above Multiple Choice Question 80 Which of the following supports the trade-off theory of capital structure? [removed] Firms use cash on hand first, since issuing equity and debt is expensive. [removed] A firm’s capital structure is the result of past equity and debt issuance decisions. [removed] Firms have a target capital structure. [removed] Both firms use cash on hand first, since issuing equity and debt is expensive and a firm’s capital structure is the result of past equity and debt issuance decisions. Multiple Choice Question 39 Which of the following statements is true of S-corporation? [removed] An S-corporation can have more than 100 stockholders. [removed] An S -corporation is a variation of the LLC (limited liability company). [removed] All profits of an S-corporation pass directly to the stockholders as they would pass to the partners in a partnership. [removed] Only foreign investors can own the shares of an S-corporation. Multiple Choice Question 43 Which of the following statements is true about business plans? [removed] A well-prepared business plan makes it easier for an entrepreneur to communicate to potential investors precisely what returns an investor might expect to receive. [removed] A well-prepared business plan always avoids contingent liabilities as the plan helps to predict and change the occurrence of a contingent liability. [removed] A business plan is useful only in case of exigency in the business environment otherwise a business plan is not important. [removed] A business plan is a trivial part in the overall strategy formulatio…
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