CHAPTER 15
Capital Structure: Basic Concepts
Multiple Choice Questions:
I.

DEFINITIONS

HOMEMADE LEVERAGE a 1. The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called:
a. homemade leverage.
b. dividend recapture.
c. the weighted average cost of capital.
d. private debt placement.
e. personal offset.
Difficulty level: Easy
MM PROPOSITION I b 2. The proposition that the value of the firm is independent of its capital structure is called:
a. the capital asset pricing model.
b. MM Proposition I.
c. MM Proposition II.
d. the law of one price.
e. the efficient markets hypothesis.
Difficulty level: Easy
MM PROPOSITION II c 3. The proposition that the cost of equity is a positive linear function of capital structure is called:
a. the capital asset pricing model.
b. MM Proposition I.
c. MM Proposition II.
d. the law of one price.
e. the efficient markets hypothesis.
Difficulty level: Medium
INTEREST TAX SHIELD a 4. The tax savings of the firm derived from the deductibility of interest expense is called the:
a. interest tax shield.
b. depreciable basis.
c. financing umbrella.
d. current yield.
e. tax-loss carryforward savings.
Difficulty level: Easy

15-1

UNLEVERED COST OF CAPITAL b 5. The unlevered cost of capital is:
a. the cost of capital for a firm with no equity in its capital structure.
b. the cost of capital for a firm with no debt in its capital structure.
c. the interest tax shield times pretax net income.
d. the cost of preferred stock for a firm with equal parts debt and common stock in its capital structure. e. equal to the profit margin for a firm with some debt in its capital structure.
Difficulty level: Easy
WEIGHTED AVERAGE COST OF CAPITAL e 6.
The cost of capital for a firm, rWACC, in a zero tax environment is:
a.
equal to the