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Assume the manufacturing facility of a major car manufacturer is destroyed by an earth quake. The ability of the firm to raise funds required to acquire and/or retain important resources in this difficult time refers to:

a. liquidity

b.insurance impact

c.financial leverage

d.financial flexibility.

According to M&M Proposition 2, which of the following conditions would maximize the value of a firm? a. A low debt-to-equity ratio when the cost of debt remains unchanged

b. A high debt-to-equity ratio when the cost of debt changes

c. A low debt-to-equity ratio when the cost of debt changes

d. A high debt-to-equity ratio when the cost of debt remains unchanged

Which of the following is a basic assumption used in M&M Proposition 1, which states that the capital structure decisions a firm makes will have no effect on the value of the firm? a. Firms are subject to corporate income taxes

b. Trading and information costs are applicable

c. Financing decisions affect investment decisions.

d. None of the above.

The optimal capital structure of a firm is one that: a. maximizes the amount of working capital that it uses

b. maximizes the amount of working capital that it uses and minimizes the cost of financing its activities

c. maximizes the value of the firm.

d. maximizes the value of nominal cash flows that it earns.

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