Fill-in blank

1. _______ are an example of a tax-paying group that have a tax preference for high dividends.

Multiple Choice

1. Which of the following is the main reason why a company would prefer issuing debt over equity?

A) corporate debt is safer

B) issuing debt does not have any floatation cost

C) coupons paid on debt are tax deductible but dividents on stock are not

D) dividends on stock provide a tax shield but coupons on debt don't

2. According to Miller and Modigliani(1963)’s view of capital costs and financial leverage, as the use of debt financing increase:

a) the cost of capital continuously decreases

b) the cost of capital continuously increases

c) the cost of capital remains the same

d) there is no optimal level of debt financing

3. A firm’s mix of debt and equity is called its:

a) dividend policy

b) cost of capital

c) capital structure

d) unsystematic risk

4. Which one of the following is equal to the cost of debt multiplied by ratio of debt to the market value of the firm plus cost of equity multiplied by the ratio of equity to the market value of the firm?

a) IRR

b) WACC

c) Debt-to-equity ratio

d) risk adjusted NPV

5. The firm’s target capital structure is consistent with which of the following?

a) minimum cost of weighted average cost of capital

b) minimum risk

c)minimum cost of debt

d) minimum weighted average cost of equity

e) minimum return on asset