Chapter 16
Capital Structure: Basic Concepts
Multiple Choice Questions
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.
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.
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.
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 carry forward savings.