CORPORATE QUIZ 5 EXAM QUESTIONS
AND ANSWERS (VERIFIED AND
UPDATED)
Capital Structure - ANS Mix of debt and equity used to finance a firm
Goal of Capital Structure - ANS Maximize firm value
Firm Value Identity - ANS V=E+D
Enterprise Value - ANS Value of firm's operations independent of capital structure
Unlevered Firm - ANS Firm with no debt
Levered Firm - ANS Firm that uses debt financing
MM Proposition I (No Taxes) - ANS Firm value is independent of capital structure
MM Proposition II (No Taxes) - ANS Cost of equity increases with leverage
Perfect Capital Market - ANS No taxes, no transaction costs, fair pricing
@2026/2027 ALLRIGHTS RESERVED.
, Free Cash Flow - ANS Cash flow available to all investors
Value of Firm - ANS PV of free cash flows
Equity Value - ANS PV of cash flows to shareholders
Debt Value - ANS PV of promised payments to debt holders
Leverage - ANS Use of debt in capital structure
Debt-to-Equity Ratio - ANS D/E measures leverage
Cost of Unlevered Equity - ANS Return required without debt (rU)
Cost of Debt - ANS Return required by debt holders (rD)
Cost of Levered Equity - ANS rE = rU + (D/E)(rU - rD)
WACC (No Taxes) - ANS Weighted avg cost of capital equals rU
WACC Formula - ANS (E/(E+D))rE + (D/(E+D))rD
Leverage Effect - ANS Does not change firm value in MM world
Risk Allocation - ANS Debt is safer, equity is riskier
Equity Risk - ANS Increases with leverage
@2026/2027 ALLRIGHTS RESERVED.
AND ANSWERS (VERIFIED AND
UPDATED)
Capital Structure - ANS Mix of debt and equity used to finance a firm
Goal of Capital Structure - ANS Maximize firm value
Firm Value Identity - ANS V=E+D
Enterprise Value - ANS Value of firm's operations independent of capital structure
Unlevered Firm - ANS Firm with no debt
Levered Firm - ANS Firm that uses debt financing
MM Proposition I (No Taxes) - ANS Firm value is independent of capital structure
MM Proposition II (No Taxes) - ANS Cost of equity increases with leverage
Perfect Capital Market - ANS No taxes, no transaction costs, fair pricing
@2026/2027 ALLRIGHTS RESERVED.
, Free Cash Flow - ANS Cash flow available to all investors
Value of Firm - ANS PV of free cash flows
Equity Value - ANS PV of cash flows to shareholders
Debt Value - ANS PV of promised payments to debt holders
Leverage - ANS Use of debt in capital structure
Debt-to-Equity Ratio - ANS D/E measures leverage
Cost of Unlevered Equity - ANS Return required without debt (rU)
Cost of Debt - ANS Return required by debt holders (rD)
Cost of Levered Equity - ANS rE = rU + (D/E)(rU - rD)
WACC (No Taxes) - ANS Weighted avg cost of capital equals rU
WACC Formula - ANS (E/(E+D))rE + (D/(E+D))rD
Leverage Effect - ANS Does not change firm value in MM world
Risk Allocation - ANS Debt is safer, equity is riskier
Equity Risk - ANS Increases with leverage
@2026/2027 ALLRIGHTS RESERVED.
