Order capital structure theory assignment
Which of the following statements concerning capital structure theory is correct?
A In the traditional view, there is a linear relationship between the cost of equity and financial risk
B Modigliani and Miller said that, in the absence of tax, the cost of equity would remain constant
C Pecking order theory indicates that preference shares are preferred to convertible debt as a source of finance
D Business risk is assumed to be constant as the capital structure changes
5 Which of the following actions is LEAST likely to increase shareholder wealth?
A The weighted average cost of capital is decreased by a recent financing decision
B The financial rewards of directors are linked to increasing earnings per share
C The board of directors decides to invest in a project with a positive NPV
D The annual report declares full compliance with the corporate governance code
6 Which of the following statements are features of money market instruments?
(1) A negotiable security can be sold before maturity
(2) The yield on commercial paper is usually lower than that on treasury bills
(3) Discount instruments trade at less than face value
A 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
7 The following are extracts from the statement of profit or loss of CQB Co:
Sales income 60,000
Cost of sales 50,000
Profit before interest and tax 10,000
Profit before tax 6,000
Profit after tax 1,500
60% of the cost of sales is variables costs.
What is the operational gearing of CQB Co?
A 5·0 times
B 2·0 times
C 0·5 times
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D 3·0 times
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