Reference no: EM131545187

1. Which of the following statements related to M&M Proposition II is/are correct?

I. the capital structure of a firm determines where the firm is located.

II. the cost of equity rises as the firm increases its use of debt financing.

III. without corporate taxes, a firm's cost of equity is a linear function with a slope equal to RD.

IV. the cost of debt is equivalent to the required rate of return on a firm's assets.

V. the size of the pie does not depend on how the pie is sliced.

VI. none of the above statements is correct.

VI only

I and III only

IV only

II only

I, II, III and IV only

2. Which of the following statements is/are correct in relation to M&M Proposition II with no taxes?

I. The required return on assets is higher than the weighted average cost of capital.

II. Financial risk is determined by the debt-equity ratio.

III. Financial risk determines the return on assets.

IV. The cost of equity declines when the amount of leverage used by a firm rises.

III and IV only

I and II only

I only

I and IV only

II only

3. Which of the following about the dividend growth model is/are correct:

I. is not as reliable as the estimated rate of growth.

II. can only be used if historical dividend information is available.

III. does consider the risk that future dividends may vary from their estimated values.

IV. applies even when a firm does not pay dividends.

V. uses standard deviation to measure the systematic risk of a firm.

II and III only

I only

I, II and IV only

II, III and V only

III only