1. Which of the following financial statements is concerned with the company at a point

in time?

balance sheet

Explanation: The balance sheet is always set to a specific data, usually the end of an

accounting period.

2. A cost which remains constant per unit at various levels of activity is a:

fixed cost

Explanation: Fixed costs always remain the same, no matter what activity level at which

a company operates.

3. M&M Proposition 1: Dynamo Corp. produces annual cash flows of $150 and is

expected to exist forever. The company is currently financed with 75 percent equity and

25 percent debt. Your analysis tells you that the appropriate discount rates are 10

percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of

the stock.

If Dynamo wishes to change its capital structure from 75 percent equity to 60 percent

equity and use the debt proceeds to pay a special dividend to shareholders, how much

debt should they use?