CFA 2026 Level II Vignettes Corporate Finance Capital Structure Free Quiz 1

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CFA 2026 Level II Vignettes Corporate Finance Capital Structure Free Quiz 1

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CFA 2026 Level II Vignettes Corporate Finance Capital Structure Free Quiz 1

Practice CFA 2026 Level II Vignettes Corporate Finance MCQs from Capital Structure. Get instant results with Explanation.

General10 MCQs

1. Vignette 1: Capital Structure - Case Study: Under Modigliani-Miller Proposition I (no taxes), what is the relationship between firm value and capital structure?

A. Value increases with debtB. Value decreases with debtC. Value is independent of capital structureD. Value is maximized with 100% equity

2. What is MM Proposition II (without taxes)?

A. Re = R0 + (R0 – Rd) × (D/E)B. Re = R0 – (R0 – Rd) × (D/E)C. Re = R0 × (1 + D/E)D. Re = R0 + Rd × (D/E)

3. How does MM Proposition I change with corporate taxes?

A. Value is independent of debt even with taxesB. Value decreases with debtC. Value is maximized with 100% equityD. Value = Value of unlevered firm + T × D

4. What is MM Proposition II with corporate taxes?

A. Re = R0 + (R0 – Rd) × (D/E)B. Re = R0 + (R0 – Rd) × (1 – T) × (D/E)C. Re = R0 – (R0 – Rd) × (1 – T) × (D/E)D. Re = R0 × (1 + (1 – T) × (D/E))

5. What is the interest tax shield and its present value?

A. Interest tax shield = Interest expense × (1 – Tax)B. Interest tax shield = Debt × Interest rate × (1 – Tax)C. PV of tax shield = T × D (for perpetual debt)D. PV of tax shield = T × Interest expense

General10 MCQs

6. Vignette 2: Capital Structure - Case Study: According to the trade-off theory, what is the optimal capital structure?

A. Firms should always use 100% debtB. Firms should always use 0% debtC. The optimal debt level is independent of costsD. The optimal debt level balances tax shields and financial distress costs

7. What are financial distress costs?

A. Financial distress costs are both direct and indirect and increase with leverageB. Financial distress costs are only direct bankruptcy costsC. Financial distress costs are independent of leverageD. Financial distress costs only occur in bankruptcy

8. What are agency costs of debt?

A. Agency costs are only between management and shareholdersB. Agency costs of debt arise from conflicts between shareholders and debtholdersC. Agency costs of debt are always zeroD. Agency costs of debt are not relevant for capital structure

9. How does the trade-off theory determine the optimal capital structure?

A. The optimal capital structure is 100% debtB. The optimal capital structure is 100% equityC. The optimal capital structure balances tax shields and distress costsD. The optimal capital structure is the same for all firms

10. What does empirical evidence say about the trade-off theory?

A. The trade-off theory is not supported by evidenceB. The evidence shows that firms ignore tax shieldsC. The evidence shows that firms always use low leverageD. The evidence is consistent with firms balancing tax shields and distress costs

📋 CFA - Test Online Practice Quizzes

CFA

Conducting Body: CFA Institute

Frequency: 4 times a year (February, May, August, November) | Time: 135 Minutes

Negative Marking: No

⚡ Test Pattern (Total: 90 MCQs):

Alternative Investments: 8 MCQs
Corporate Issuers: 7 MCQs
Derivatives: 5 MCQs
Economics: 7 MCQs
Equity Investments: 12 MCQs
Ethics: 16 MCQs
Financial Statement Analysis: 11 MCQs
Fixed Income: 11 MCQs
Portfolio Management: 9 MCQs
Quant Methods: 6 MCQs

Merit Formula: -

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