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Question No: 33 ( Marks: 1 ) - Please choose one
Firm ABC has Rs.5 million in outstanding debt, currently has 200,000 shares outstanding priced at Rs.60 a share, and has a borrowing rate of 10%. If the firm's return on equity is 15%, what is the firm's WACC?
Question No: 34 ( Marks: 1 ) - Please choose one
Which of the following statements regarding the M&M Propositions without taxes is true?
► The total value of the firm depends on how cash flows are divided up between stockholders and bondholders, under M&M Proposition I.
► The firm's capital structure is relevant under M&M Proposition I.
► The cost of equity depends on the firm's business risk but not its financial risk, under M&M Proposition II.
► The cost of equity rises as the firm increases its use of debt financing under M&M Proposition II.
Question No: 35 ( Marks: 1 ) - Please choose one
Which one of the following is correct for the spot exchange rate?
► This is the rate today for exchanging one currency for another for immediate delivery
► This is the rate today for exchanging one currency for another at a specific future date
► This is the rate today for exchanging one currency for another at a specific location on a specific future date
► This is the rate today for exchanging one currency for another at a specific location for immediate delivery
Question No: 36 ( Marks: 1 ) - Please choose one
The restructuring of a firm should be undertaken, when:
► The restructuring is expected to create value for shareholders
► The restructuring is expected to increase earnings per share next year
► The restructuring is expected to increase the firm's market share power in industry
► The current employees will receive additional stock options to align employee interest
Question No: 37 ( Marks: 1 ) - Please choose one
Which of the following term is used when the firm can independently control considerable assets with a very limited amount of equity?
► Joint venture
► Leveraged buyout (LBO)
Question No: 38 ( Marks: 1 ) - Please choose one
What is the economic order quantity for an automobile dealer selling 2,000 cars per year, at a cost of Rs.750 per order, and a carrying cost of Rs.300 per automobile?
► 40 cars
► 71 cars
► 100 cars
► 126 cars
Question No: 39 ( Marks: 1 ) - Please choose one
As the amount of __________ increases the present value of net tax-shield benefits of debt increases.
► Common equity
► Preffered equity
Question No: 40 ( Marks: 1 ) - Please choose one
Why the present value of the costs of financial distress increases with increases in the debt ratio?
► Expected return on assets increases
► Present value of the interest tax shield is greater
► Equity tax shield is depleted
► Probability of default and/or bankruptcy is greater
Question No: 41 ( Marks: 5 )
What are the real markets effects of leverage on WAAC? (Answer the question in bulleted form only).
Answer: Real Markets Effects of leverage on WACC:
• Increase in leverage causes a a large increase in cost of equity
• Increase in leverage causes relatively small increase in cost of debt as compared to cost of equity
• As leverage increases WACC 1st falls because of tax saving shield.
• With further increase in leverage WACC fall to its minimum point which is the optimal point for capital structure
• Further increase in leverage causes increase in WACC because of bankruptcy risk