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Effect & Benefit of Debt- Easy but confusing mult choice question!

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Confusing Multiple Choice Questions!

#11- The positive value to the firm by adding debt to the capital structure in the presence of corporate taxes is:
I) Due to the extra cash flow going to the investors of the firm rather than the tax authorities
II) Due to the earnings before interest and taxes being fully taxed at the corporate rate
III) Because personal - tax rates are the same as corporate tax rates

A. I only
B. II only
C. III only
D. II and III only

#17- Although the use of debt provides tax benefits to the firm, debt also puts pressure on the firm to:
I) Meet interest and principal payments which if not met can put the company into financial distress
II) Make dividend payments which if not met can put the company into financial distress
III) Meet both interest and dividend payments which when met increase the firm cash flow
IV) Meet increased tax payments thereby increasing firm value

A. I only
B. II only
C. II and III only
D. III and IV only

#3- A stock with a beta of 1. 25 would be expected to:

A. Increase in returns 25% faster than the market in up markets
B. Increase in returns 25% faster than the market in down markets
C. Increase in returns 125% faster than the market in up markets
D. Increase in returns 125% faster than the market in down markets

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Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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