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Tag: VU. FIN622-. Corporate Finance .(Session – 5). MIDTERM. EXAMINATION .Spring .2009

VU FIN622- Corporate Finance (Session – 5) MIDTERM EXAMINATION Spring 2009



Spring 2009

FIN622- Corporate Finance (Session – 5)

Question No: 1 — Please choose one

Which of the following could be used to calculate the cost of common equity?

► Interpolation method

► Dividend discount model

► YTM method

Capital structure valuation –

Capital structure of a typical company may consist of ordinary shares, preference

stock, short term and long-term loan, bonds and leases. These components in

capital structure have their own cost and if we add all the individual components

cost after adjusting with the weight age of each, the resultant value is known as

weighted cost of capital. In order to compute the WACC we need to calculate the

individual components cost. First of all we take up the Equity part of the capital

and will see how we can compute the cost of equity.

Question No: 2 — Please choose one

What will be the effect of reduction in the cost of capital on the accounting break-even

level of revenues?

► It raises the break-even level.

► It reduces the break-even level.

It has no effect on the break-even level. –

► This cannot be determined without knowing the length of the investment horizon.

Question No: 3 — Please choose one

In Capital Assets Pricing Model, which of the following shows time value of money?

► Beta of the security

Risk free rate of return –

► Risk premium

► Market rate of return

Question No: 4 — Please choose one

Which of the following is a proposition of Miller and Modigliani theory of Capital


Value of a firm is independent of its capital structure –

► Value of a firm is independent of its level of debt

► Value of a firm is dependent of its cost of capital

► Value of a firm is independent on its level of equity finances

Question No: 5 — Please choose one

In which of the following dividend policies, the amount of dividend is relatively fixed?

Constant payout ratio policy –

► Hybrid dividend policy

► Residual dividend policy

► Stable dividend policy

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