491. Which of the following is true for leveraged beta?
A. Leveraged beta represents fundamental operational risk.
B. Leveraged beta represents financial risk from leverage.
C. Leveraged beta represents fundamental operational risk plus financial risk from leverage.
D. Leveraged beta represents fundamental operational risk minus financial risk from leverage.
492. Which of the following does not make the firm more vulnerable to financial distress?
A. High sensitivity of the company’s revenues to the general level of economic activity.
B. High proportion of fixed to variable costs.
C. Physical capital assets which are relatively illiquid and difficult-to-market.
D. The tax shield.
493. Why is it generally believed that there is an optimal capital gearing ratio?
A. There is a precise gearing ratio at which the benefit of the tax shield is exactly matched by the increasing risk of financial distress.
B. There is a precise gearing ratio at which the risk of the tax shield is exactly matched by the increasing benefit of financial distress.
C. There is a precise gearing ratio at which the benefit of the tax shield is exactly matched by the increasing risk of agency.
D. There is a precise gearing ratio at which the benefit of managerial motivation is exactly matched by the increasing risk of agency.
494. Which of the following represents Modigliani and Miller’s first position on the effect of capital gearing on Weighted Average Cost of Capital (WACC)?
A. There is a negative relationship between financial gearing and the WACC because of the ‘free lunch’ effect of the tax shield.
B. There is a positive relationship between financial gearing and the WACC because of financial distress.
C. There is no relationship between financial gearing and the WACC as there are no ‘free lunch’ benefits from higher gearing.
D. There is a positive relationship between financial gearing and the WACC because of the increased volatility of the ROE.
495. Which of the following represents Modigliani and Miller’s second position on the effect of capital gearing?
A. There is a negative relationship between financial gearing and the WACC because of the ‘free lunch’ effect of the tax shield.
B. There is a positive relationship between financial gearing and the WACC because of financial distress.
C. There is no relationship between financial gearing and the WACC as there are no ‘free lunch’ benefits from higher gearing
D. There is a positive relationship between financial gearing and the WACC because of the increased volatility of the ROE.
496. Pecking order theory suggests which of the following?
A. Internal funds, debt, and external equity have the same risk-adjusted return.
B. Debt is preferred to external equity and internal funds.
C. External equity is preferred to debt which is preferred to internal funds.
D. Internal capital is preferred to debt which is preferred to external funds.
497. Pecking order theory implies…?
A. There is a negative relationship between financial gearing and the WACC because of the ‘free lunch’ effect of the tax shield.
B. There is a positive relationship between financial gearing and the WACC because of financial distress.
C. There is no relationship between financial gearing and the WACC as there are no ‘free lunch’ benefits from higher gearing.
D.The level of gearing is not selected but is itself determined by other strategic business decisions.
498. In the context of imperfect and asymmetric information, how does the stock market react to the signal of a cut in dividend by a company?
A. The market sells, share price is lowered.
B. The market buys, share price is raised.
C. The market does not react, price remains the same.
D. None of the above. It depends on how the information is interpreted.
499. Which of the following is not a reason why companies are not always entirely clear on their dividend policy?
A. For fear of giving away sensitive information.
B. In order to maintain a managerial advantage over shareholders.
C. Because they do not know how much is available for dividends.
D. Companies have different abilities to communicate.
500. In both their dividend model and capital gearing model, Modigliani and Miller use which of the following principles?
A. The value of the firm is fundamentally determined by its capital gearing ratio.
B. The value of the firm is fundamentally determined by the NPV of the firm’s projects.
C. The value of the firm is fundamentally determined by its dividend policy.
D. The value of the firm is fundamentally determined by the ability of managers to communicate with the capital markets.
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