PRACTICE EXAM 1
On the actual exam:
You are allowed to use a calculator.
You are not allowed to use a programmable calculator.
You are not allowed to use notes.
You are not allowed to use a dictionary.
Question 1.
Assume we are in the Modigliani-Miller world. There is an all-equity firm with a
current value of $100 million. The required return for shareholders is 9%. The
company plans to replace half of its equity with debt, with an interest rate of 6%. The
company does not pay taxes and does not suffer from other imperfections. What will
its shareholders demand for a return after the change in capital structure?
, Question 2.
According to the static tradeoff theory, should profitable firms have higher or lower
leverage, all else equal? Please provide a separate reasoning based on 1) taxes, 2)
financial distress, and 3) agency problems.
Profitable firms should have …………… leverage (fill in “higher” or “lower”)
1.
2.
3.
On the actual exam:
You are allowed to use a calculator.
You are not allowed to use a programmable calculator.
You are not allowed to use notes.
You are not allowed to use a dictionary.
Question 1.
Assume we are in the Modigliani-Miller world. There is an all-equity firm with a
current value of $100 million. The required return for shareholders is 9%. The
company plans to replace half of its equity with debt, with an interest rate of 6%. The
company does not pay taxes and does not suffer from other imperfections. What will
its shareholders demand for a return after the change in capital structure?
, Question 2.
According to the static tradeoff theory, should profitable firms have higher or lower
leverage, all else equal? Please provide a separate reasoning based on 1) taxes, 2)
financial distress, and 3) agency problems.
Profitable firms should have …………… leverage (fill in “higher” or “lower”)
1.
2.
3.
