BA 4106 Advanced Corporate Finance MIDTERM EXAM QUESTIONS & ANSWERS

BA 4106 Advanced Corporate Finance MIDTERM EXAM QUESTIONS & ANSWERS

1. Which of the following best defines the Modigliani-Miller
theorem concerning capital structure irrelevance?
 - A. It suggests that in a world with no taxes or bankruptcy costs,
leverage does not affect the firm value.
 - B. It states that high leverage always increases firm value.
 - C. It proposes that only debt increases firm value.
 - D. It implies stock pricing is irrelevant to capital structure.
 Answer: A.
 Rationale: Modigliani-Miller theorem argues that in perfect
markets without taxes or bankruptcy costs, the capital structure
doesn't impact the overall value of the firm.
2. A firm's weighted average cost of capital (WACC) is critically
important for which of the following reasons?
 - A. It determines the firm's tax liability.
 - B. It sets the minimum return required for capital budgeting
projects.
 - C. It is used to assess operational effectiveness.
 - D. It dictates the firm's cash flow strategies.

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