BADM 710 ACTUAL EXAM PAPER 2026
QUESTIONS SOLUTIONS GRADED A+
●● The firm's capital structure refers to the:
A: mix of current and fixed assets a firm holds.
B: amount of capital invested in the firm.
C: amount of dividends a firm pays.
D: mix of debt and equity used to finance the firm's assets.
E: amount of cash versus receivables the firm holds. Answer: D: mix of
debt and equity used to finance the firm's assets.
●● A manager should attempt to maximize the value of the firm by
changing the capital structure if and only if the value of the firm
increases:
A: as a result of the change.
B: to the sole benefit of the managers.
C: to the sole benefit of the debtholders.
D: while also decreasing shareholder value.
E: while holding stockholder value constant. Answer: A: as a result of
the change.
,●● MM Proposition I without taxes proposes that:
A: the value of an unlevered firm exceeds that of a levered firm.
B: there is one ideal capital structure for each firm.
C: leverage does not affect the value of the firm.
D: shareholder wealth is directly affected by the capital structure
selected.
E: the value of a levered firm exceeds that of an unlevered firm. Answer:
C: leverage does not affect the value of the firm.
●● A key underlying assumption of MM Proposition I without taxes is
that:
A: financial leverage increases risk.
B: individuals can borrow at lower rates than corporations.
C: individuals and corporations borrow at the same rate.
D: managers always act to maximize the value of the firm.
E: corporations are all-equity financed. Answer: C: individuals and
corporations borrow at the same rate.
●● MM Proposition I with taxes supports the theory that:
, A: there is a positive linear relationship between the amount of debt in a
levered firm and its value.
B: the value of a firm is inversely related to the amount of leverage used
by the firm.
C: the value of an unlevered firm is equal to the value of a levered firm
plus the value of the interest tax shield.
D: a firm's cost of capital is the same regardless of the mix of debt and
equity used by the firm.
E: a firm's weighted average cost of capital increases as the debt-equity
ratio of the firm rises. Answer: A: there is a positive linear relationship
between the amount of debt in a levered firm and its value.
●● MM Proposition II with taxes:
A: has the same general implications as MM Proposition II without
taxes.
B: reveals how the interest tax shield relates to the value of a firm.
C: supports the argument that business risk is determined by the capital
structure employed by a firm.
D: supports the argument that the cost of equity decreases as the debt-
equity ratio increases.
E: reaches the final conclusion that the capital structure decision is
irrelevant to the value of a firm. Answer: A: has the same general
implications as MM Proposition II without taxes.
QUESTIONS SOLUTIONS GRADED A+
●● The firm's capital structure refers to the:
A: mix of current and fixed assets a firm holds.
B: amount of capital invested in the firm.
C: amount of dividends a firm pays.
D: mix of debt and equity used to finance the firm's assets.
E: amount of cash versus receivables the firm holds. Answer: D: mix of
debt and equity used to finance the firm's assets.
●● A manager should attempt to maximize the value of the firm by
changing the capital structure if and only if the value of the firm
increases:
A: as a result of the change.
B: to the sole benefit of the managers.
C: to the sole benefit of the debtholders.
D: while also decreasing shareholder value.
E: while holding stockholder value constant. Answer: A: as a result of
the change.
,●● MM Proposition I without taxes proposes that:
A: the value of an unlevered firm exceeds that of a levered firm.
B: there is one ideal capital structure for each firm.
C: leverage does not affect the value of the firm.
D: shareholder wealth is directly affected by the capital structure
selected.
E: the value of a levered firm exceeds that of an unlevered firm. Answer:
C: leverage does not affect the value of the firm.
●● A key underlying assumption of MM Proposition I without taxes is
that:
A: financial leverage increases risk.
B: individuals can borrow at lower rates than corporations.
C: individuals and corporations borrow at the same rate.
D: managers always act to maximize the value of the firm.
E: corporations are all-equity financed. Answer: C: individuals and
corporations borrow at the same rate.
●● MM Proposition I with taxes supports the theory that:
, A: there is a positive linear relationship between the amount of debt in a
levered firm and its value.
B: the value of a firm is inversely related to the amount of leverage used
by the firm.
C: the value of an unlevered firm is equal to the value of a levered firm
plus the value of the interest tax shield.
D: a firm's cost of capital is the same regardless of the mix of debt and
equity used by the firm.
E: a firm's weighted average cost of capital increases as the debt-equity
ratio of the firm rises. Answer: A: there is a positive linear relationship
between the amount of debt in a levered firm and its value.
●● MM Proposition II with taxes:
A: has the same general implications as MM Proposition II without
taxes.
B: reveals how the interest tax shield relates to the value of a firm.
C: supports the argument that business risk is determined by the capital
structure employed by a firm.
D: supports the argument that the cost of equity decreases as the debt-
equity ratio increases.
E: reaches the final conclusion that the capital structure decision is
irrelevant to the value of a firm. Answer: A: has the same general
implications as MM Proposition II without taxes.
