Question 1

Repurchasing common stock decreases a firm's debt to equity ratio.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements is false?

Accepted Answer

A)  Combined leverage is the effect on earnings produced by the operating and financial leverage. 
B)  There is strong empirical evidence that firms adjust their degrees of operating leverage and degrees of financial leverage to match some standard degree of combined leverage. 
C)  Financial risk is the additional risk, above business risk, resulting from substituting debt into the capital structure. 
D)  A firm's degree of combined leverage is the product of its degree of operating leverage and its degree of financial leverage. 
A)  Combined leverage is the effect on earnings produced by the operating and financial leverage. 
B)  There is strong empirical evidence that firms adjust their degrees of operating leverage and degrees of financial leverage to match some standard degree of combined leverage. 
C)  Financial risk is the additional risk, above business risk, resulting from substituting debt into the capital structure. 
D)  A firm's degree of combined leverage is the product of its degree of operating leverage and its degree of financial leverage.

Question 3

Finance theory favors the use of ____________ value weights in the calculation of the weighted average cost of capital.

Accepted Answer

A)  book 
B)  future 
C)  market 
D)  GAAP 
A)  book 
B)  future 
C)  market 
D)  GAAP

Question 4

A reduction in the dividend payout ratio implies a higher retention rate.

Accepted Answer

A) True 
 B)False

Question 5

Ningbo Shipping, which has an average tax rate of 40 percent, would like to estimate the after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950. Based on this information, the after-tax cost of debt is:

Accepted Answer

A)  7.7%. 
B)  12.0%. 
C)  12.8%. 
D)  15%. 
A)  7.7%. 
B)  12.0%. 
C)  12.8%. 
D)  15%.

Question 6

(RR)(ROA) / [1 - (RR)(ROA)]

Accepted Answer

A)  Internal rate of return 
B)  Internal growth rate 
C)  Retention rate 
D)  Dividend payout ratio 
A)  Internal rate of return 
B)  Internal growth rate 
C)  Retention rate 
D)  Dividend payout ratio

Question 7

All of the following statements are correct except:

Accepted Answer

A)  Relevant cash flows are incremental after-tax cash flows, which must be discounted using an incremental after-tax cost of capital. 
B)  The firm's relevant cost of capital is computed from before-tax financing costs. 
C)  A project's incremental cash flows must be discounted at a cost of capital that represents the incremental or marginal cost to the firm of financing the project, that is, the cost of raising one additional dollar of capital. 
D)  In estimating the cost of capital, the firm's analysts need to evaluate investors' expected returns under likely market conditions and then use these expected returns to compute the firm's marginal future cost of raising funds. 
A)  Relevant cash flows are incremental after-tax cash flows, which must be discounted using an incremental after-tax cost of capital. 
B)  The firm's relevant cost of capital is computed from before-tax financing costs. 
C)  A project's incremental cash flows must be discounted at a cost of capital that represents the incremental or marginal cost to the firm of financing the project, that is, the cost of raising one additional dollar of capital. 
D)  In estimating the cost of capital, the firm's analysts need to evaluate investors' expected returns under likely market conditions and then use these expected returns to compute the firm's marginal future cost of raising funds.

Question 8

A firm's DOL affects the amount of debt it can issue.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is correct?

Accepted Answer

A)  All component costs in a firm's weighted average cost of capital must reflect after-tax costs, but the only component that requires an adjustment for taxes is the cost of new common stock. 
B)  An increase in the marginal corporate tax rate would lower the weighted average cost of capital for the firm, other things held constant. 
C)  The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt. 
D)  The WACC is the sum of the Fed Funds rate and the firm's bond coupon rate. 
A)  All component costs in a firm's weighted average cost of capital must reflect after-tax costs, but the only component that requires an adjustment for taxes is the cost of new common stock. 
B)  An increase in the marginal corporate tax rate would lower the weighted average cost of capital for the firm, other things held constant. 
C)  The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt. 
D)  The WACC is the sum of the Fed Funds rate and the firm's bond coupon rate.

Question 10

Using the constant dividend growth model, which of the following components is not considered?

Accepted Answer

A)  current stock price 
B)  dividend growth rate 
C)  risk-free rate 
D)  the Treasury bond rate 
A)  current stock price 
B)  dividend growth rate 
C)  risk-free rate 
D)  the Treasury bond rate

Question 11

A firm's degree of combined leverage is the product of its degree of operating leverage and its degree of financial leverage

Accepted Answer

A) True 
 B)False

Question 12

In calculating the cost of new common stock using the constant dividend growth model, it is important that the __________ are subtracted from the price of the stock.

Accepted Answer

A)  flotation costs 
B)  par value 
C)  cost of retained earnings 
D)  proceeds of the sale 
A)  flotation costs 
B)  par value 
C)  cost of retained earnings 
D)  proceeds of the sale

Question 13

Similar to the net present value method, there is a formula to determine the proportions of debt and equity a firm should use to finance its assets.

Accepted Answer

A) True 
 B)False

Question 14

A high degree of financial leverage means that a small change in sales will result in:

Accepted Answer

A)  a small change in earnings per share 
B)  a large change in earnings per share 
C)  no change in earnings per share 
D)  always a negative change in earnings per share 
A)  a small change in earnings per share 
B)  a large change in earnings per share 
C)  no change in earnings per share 
D)  always a negative change in earnings per share

Question 15

The green growth rate is the estimate of how quickly a firm can grow when it uses internal equity and debt financing to keep its capital structure constant over time.

Accepted Answer

A) True 
 B)False

Question 16

The degree of combined leverage shows us to what degree a percentage change in sales will cause a percentage change in:

Accepted Answer

A)  earnings before interest and taxes 
B)  pre-tax earnings 
C)  earnings per share 
D)  gross profit 
A)  earnings before interest and taxes 
B)  pre-tax earnings 
C)  earnings per share 
D)  gross profit

Question 17

The pecking order hypothesis implies that firm's have no optimal debt/equity ratios.

Accepted Answer

A) True 
 B)False

Question 18

For any firm's given growth strategy, its dividend decision directly affects its capital structure decision.

Accepted Answer

A) True 
 B)False

Question 19

All of the following statements are correct except:

Accepted Answer

A)  A firm's business risk is measured by its variability in EBIT over time and is affected by several factors, including the business cycle, competitive pressures, and the firm's operating leverage or its level of fixed operating costs. 
B)  The degree of financial leverage measures the sensitivity of earnings per share to changes in EBIT. 
C)  The degree of combined leverage is the percentage change in gross profit that results from a 1 percent change in sales volume. 
D)  The degree of combined leverage is simply the product of its degree of operating leverage and its degree of financial leverage. 
A)  A firm's business risk is measured by its variability in EBIT over time and is affected by several factors, including the business cycle, competitive pressures, and the firm's operating leverage or its level of fixed operating costs. 
B)  The degree of financial leverage measures the sensitivity of earnings per share to changes in EBIT. 
C)  The degree of combined leverage is the percentage change in gross profit that results from a 1 percent change in sales volume. 
D)  The degree of combined leverage is simply the product of its degree of operating leverage and its degree of financial leverage.

Question 20

Firms with highly variable EBIT can afford to issue large amounts of debt.

Accepted Answer

A) True 
 B)False

Repurchasing common stock decreases a firm's debt to equity ratio.

Which of the following statements is false?

Finance theory favors the use of ____________ value weights in the calculation of the weighted average cost of capital.

A reduction in the dividend payout ratio implies a higher retention rate.

Ningbo Shipping, which has an average tax rate of 40 percent, would like to estimate the after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950. Based on this information, the after-tax cost of debt is:

(RR)(ROA) / [1 - (RR)(ROA)]

All of the following statements are correct except:

A firm's DOL affects the amount of debt it can issue.

Which of the following statements is correct?

Using the constant dividend growth model, which of the following components is not considered?

A firm's degree of combined leverage is the product of its degree of operating leverage and its degree of financial leverage

In calculating the cost of new common stock using the constant dividend growth model, it is important that the __________ are subtracted from the price of the stock.

Similar to the net present value method, there is a formula to determine the proportions of debt and equity a firm should use to finance its assets.

A high degree of financial leverage means that a small change in sales will result in:

The green growth rate is the estimate of how quickly a firm can grow when it uses internal equity and debt financing to keep its capital structure constant over time.

The degree of combined leverage shows us to what degree a percentage change in sales will cause a percentage change in:

The pecking order hypothesis implies that firm's have no optimal debt/equity ratios.

For any firm's given growth strategy, its dividend decision directly affects its capital structure decision.

All of the following statements are correct except:

Firms with highly variable EBIT can afford to issue large amounts of debt.

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Banks and Other Financial Institutions

Federal Reserve System

Policy Makers and the Money Supply

International Finance and Trade

Savings and Investment Process

Interest Rates

Time Value of Money

Bonds and Stocks: Characteristics and Valuations

Securities and Markets

Financial Return and Risk Concepts

Business Organization and Financial Data

Financial Analysis and Long-Term Financial Planning

Managing Working Capital

Short-Term Business Financing

Capital Budgeting Analysis

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Exam 18: Capital Structure and the Cost of Capital

Repurchasing common stock decreases a firm's debt to equity ratio.

Which of the following statements is false?

Finance theory favors the use of ____________ value weights in the calculation of the weighted average cost of capital.

A reduction in the dividend payout ratio implies a higher retention rate.

Ningbo Shipping, which has an average tax rate of 40 percent, would like to estimate the after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950. Based on this information, the after-tax cost of debt is:

(RR)(ROA) / [1 - (RR)(ROA)]

All of the following statements are correct except:

A firm's DOL affects the amount of debt it can issue.

Which of the following statements is correct?

Using the constant dividend growth model, which of the following components is not considered?

A firm's degree of combined leverage is the product of its degree of operating leverage and its degree of financial leverage

In calculating the cost of new common stock using the constant dividend growth model, it is important that the __________ are subtracted from the price of the stock.

Similar to the net present value method, there is a formula to determine the proportions of debt and equity a firm should use to finance its assets.

A high degree of financial leverage means that a small change in sales will result in:

The green growth rate is the estimate of how quickly a firm can grow when it uses internal equity and debt financing to keep its capital structure constant over time.

The degree of combined leverage shows us to what degree a percentage change in sales will cause a percentage change in:

The pecking order hypothesis implies that firm's have no optimal debt/equity ratios.

For any firm's given growth strategy, its dividend decision directly affects its capital structure decision.

All of the following statements are correct except:

Firms with highly variable EBIT can afford to issue large amounts of debt.

The Financial Environment

Money and the Monetary System

Banks and Other Financial Institutions

Federal Reserve System

Policy Makers and the Money Supply

International Finance and Trade

Savings and Investment Process

Interest Rates

Time Value of Money

Bonds and Stocks: Characteristics and Valuations

Securities and Markets

Financial Return and Risk Concepts

Business Organization and Financial Data

Financial Analysis and Long-Term Financial Planning

Managing Working Capital

Short-Term Business Financing

Capital Budgeting Analysis

Filters