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31.MM Proposition II states that:I) the expected return equity positively
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# Question : 31.MM Proposition II states that:I) the expected return equity positively : 1409508

31.MM Proposition II states that:

I) the expected return on equity is positively related to leverage;
II) the required return on equity is a linear function of the firm's debt to equity ratio;
III) the risk to equity increases with leverage

A. I only

B. II only

C. III only

D. I, II, and III

32.Learn and Earn Company is financed entirely by common stock that is priced to offer a 20% expected rate of return. The stock price is \$60 and the earnings per share are \$12. The company wishes to repurchase 50% of the stock and substitutes an equal value of debt yielding 8%. Suppose that before refinancing, an investor owned 100 shares of Learn and Earn common stock. What should he do if he wishes to ensure that risk and expected return on his investment are unaffected by this refinancing?

A. Borrow \$3,000 and buy 50 more shares.

B. Continue to hold 100 shares.

C. Sell 50 shares and purchase \$3,000 of 8% debt (bonds).

D. Sell 8% of his stock and invest in bonds.

33.A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm is considering a new capital structure with 60% debt. The interest rate on the debt would be 8%. Assuming there are no taxes, its cost of equity capital with the new capital structure would be:

A. 8%

B. 16%

C. 13%

D. 10%

34.The cost of capital for a firm, rWACC, in a tax-free environment is:

I) equal to the market value weighted average of the return on equity and the return on debt;
II) equal to rA, the rate of return for that business risk class;
III) equal to the overall rate of return required on the levered firm

A. I only

B. II only

C. III only

D. I, II, and III

35.A firm has a debt-to-equity ratio of 1.0. If it had no debt, its cost of equity would be 12%. Its cost of debt is 9%. What is its cost of equity if there are no taxes?

A. 21%

B. 18%

C. 15%

D. 16%

36.A firm has a debt-to-equity ratio of 0.50. Its cost of debt is 10%. Its overall cost of capital is 14%. What is its cost of equity if there are no taxes?

A. 13%

B. 16%

C. 15%

D. 18%

14 = [1/3](10) + (2/3)(X); solve for X; 42 = 10 + 2X; X = 16%.

37.A firm is unlevered and has a cost of equity capital of 9%. What is the cost of equity if the firm becomes levered at a debt-equity ratio of 2? The expected cost of debt is 7%. (Assume no taxes.)

A. 15.0%

B. 16.0%

C. 14.5%

D. 13.0%

38.A firm has a debt-to-equity ratio of 1. Its levered cost of equity is 16%, and its cost of debt is 8%. If there were no taxes, what would be its cost of equity if the debt-to-equity ratio were zero?

A. 8%

B. 10%

C. 12%

D. 14%

16 = rA + 1(rA - 8); 16 = 2rA - 8; 24 = 2rA; rA = 12%.

39.For a levered firm where bA = beta of assets and bD = beta of debt, the equity beta (bE) equals:

A. bE = bA

B. bE = bA + (D/E) × [bA - bD]

C. bE = bA + (D/(D + E)) × [bA - bD]

D. none of the options

40.For a levered firm where bA = beta of assets and bD = beta of debt, the return on equity (rE) is equal to:

A. rE = rA

B. rE = rA + (D/E) × [rA - rB]

C. rE = rA + (D/(D + E)) × [rA - rB]

D. none of the options

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