Question 1

According to the signaling theory, which of the following is considered a signal from an investor's point of view?

Accepted Answer

A)  A small company raising any required new capital by issue of new shares 
B)  A mature company raising any required new capital by issue of new shares 
C)  A small company maintaining a reserve borrowing capacity 
D)  A mature company maintaining a reserve borrowing capacity 
E)  A mature company raising any required new capital using debt beyond the normal target capital structure 
A)  A small company raising any required new capital by issue of new shares 
B)  A mature company raising any required new capital by issue of new shares 
C)  A small company maintaining a reserve borrowing capacity 
D)  A mature company maintaining a reserve borrowing capacity 
E)  A mature company raising any required new capital using debt beyond the normal target capital structure

Question 2

In 2015, a company had a total debt of $7 million. In 2016, the debt increased to $9 million. The change in earnings per share (EPS) of the company will be a direct result of change in its:

Accepted Answer

A)  level of operations. 
B)  net operating income. 
C)  coefficient of variation. 
D)  capital structure 
E)  standard deviation. 
A)  level of operations. 
B)  net operating income. 
C)  coefficient of variation. 
D)  capital structure 
E)  standard deviation.

Question 3

Which of the following is an example of business risk?

Accepted Answer

A)  Default risk 
B)  Prepayment risk 
C)  Strategic risk 
D)  Currency risk 
E)  Equity risk 
A)  Default risk 
B)  Prepayment risk 
C)  Strategic risk 
D)  Currency risk 
E)  Equity risk

Question 4

According to the signaling theory, what is symmetric information?

Accepted Answer

A)  The situation in which investors and managers have identical information about the firm's prospects 
B)  The situation in which employees and managers have identical information about the firm's prospects 
C)  The situation in which investors and creditors have identical information about the firm's prospects 
D)  The situation in which managers have different (better) information about their firm's prospects than outside investors 
E)  The situation in which employees have different (better) information about their firm's prospects than managers 
A)  The situation in which investors and managers have identical information about the firm's prospects 
B)  The situation in which employees and managers have identical information about the firm's prospects 
C)  The situation in which investors and creditors have identical information about the firm's prospects 
D)  The situation in which managers have different (better) information about their firm's prospects than outside investors 
E)  The situation in which employees have different (better) information about their firm's prospects than managers

Question 5

If a mature firm announces a new stock offering, the price of its stock will decline. To avoid this, the firm should _____.

Accepted Answer

A)  repurchase the existing stock 
B)  finance only through debt 
C)  maintain a reserve borrowing capacity 
D)  convert all common stock into preferred stock 
E)  maintain a minimum amount of floating stock 
A)  repurchase the existing stock 
B)  finance only through debt 
C)  maintain a reserve borrowing capacity 
D)  convert all common stock into preferred stock 
E)  maintain a minimum amount of floating stock

Question 6

If a firm with favorable prospects sells new shares, _____.

Accepted Answer

A)  the debt/assets ratio of the firm will increase 
B)  the marginal bankruptcy-related costs of the firm will increase 
C)  the retained earnings of the firm will decrease 
D)  the tax payable by the firm will decrease 
E)  the value of the firm's stock will decrease. 
A)  the debt/assets ratio of the firm will increase 
B)  the marginal bankruptcy-related costs of the firm will increase 
C)  the retained earnings of the firm will decrease 
D)  the tax payable by the firm will decrease 
E)  the value of the firm's stock will decrease.

Question 7

With which of the followingis a firm's target capital structure consistent?

Accepted Answer

A)  Maximum earnings per share 
B)  Minimum cost of debt (rd) 
C)  Minimum risk 
D)  Minimum cost of equity (rs) 
E)  Minimum weighted average cost of capital 
A)  Maximum earnings per share 
B)  Minimum cost of debt (rd) 
C)  Minimum risk 
D)  Minimum cost of equity (rs) 
E)  Minimum weighted average cost of capital

Question 8

A degree of operating leverage of 1.5 times indicates that _____.

Accepted Answer

A)  for every 1 percent change in EPS there will be a 1.5 percent change in sales 
B)  for every 1 percent change in interest there will be a 1.5 percent change in EBIT 
C)  for every 1 percent change in sales there will be a 1.5 percent change in EBIT 
D)  for every 1 percent change in EBIT there will be a 1.5 percent change in EPS 
E)  for every 1 percent change in sales there will be a 1.5 percent change in EPS 
A)  for every 1 percent change in EPS there will be a 1.5 percent change in sales 
B)  for every 1 percent change in interest there will be a 1.5 percent change in EBIT 
C)  for every 1 percent change in sales there will be a 1.5 percent change in EBIT 
D)  for every 1 percent change in EBIT there will be a 1.5 percent change in EPS 
E)  for every 1 percent change in sales there will be a 1.5 percent change in EPS

Question 9

The fact that interest is tax-deductible makes corporate debt less expensive than common stock or preferred stock.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following assumptions outlined by Modigliani and Miller (MM) theory is realistic?

Accepted Answer

A)  Brokerage costs do not exist. 
B)  Personal income taxes do not exist. 
C)  Bankruptcy does not exist. 
D)  The value of a firm will be maximized by financing almost entirely with debt. 
E)  Interest on capital debt is tax deductibile. 
A)  Brokerage costs do not exist. 
B)  Personal income taxes do not exist. 
C)  Bankruptcy does not exist. 
D)  The value of a firm will be maximized by financing almost entirely with debt. 
E)  Interest on capital debt is tax deductibile.

Question 11

As a general rule, the optimal capital structure is the one that:

Accepted Answer

A)  maximizes expected EPS and the price per share of common stock. 
B)  minimizes the interest rate on debt and maximizes the expected earnings per share. 
C)  minimizes the required rate on equity and maximizes the stock price. 
D)  maximizes the price per share of common stock and minimizes the weighted average cost of capital. 
E)  minimizes the expected earnings per share and maximizes the weighted average cost of capital. 
A)  maximizes expected EPS and the price per share of common stock. 
B)  minimizes the interest rate on debt and maximizes the expected earnings per share. 
C)  minimizes the required rate on equity and maximizes the stock price. 
D)  maximizes the price per share of common stock and minimizes the weighted average cost of capital. 
E)  minimizes the expected earnings per share and maximizes the weighted average cost of capital.

Question 12

Which of the following intensifies the business risk borne by the common stockholders of a firm?

Accepted Answer

A)  Fixed-income securities 
B)  Sales variability 
C)  Input price variability 
D)  Operating leverage 
E)  Firm-specific risk 
A)  Fixed-income securities 
B)  Sales variability 
C)  Input price variability 
D)  Operating leverage 
E)  Firm-specific risk

Question 13

The optimal capital structure will always be lower than the debt/assets ratio that maximizes the _____.

Accepted Answer

A)  expected EPS 
B)  weighted average cost of capital 
C)  beta coefficients 
D)  degree of financial leverage 
E)  net operating income 
A)  expected EPS 
B)  weighted average cost of capital 
C)  beta coefficients 
D)  degree of financial leverage 
E)  net operating income

Question 14

The degree of operating leverage is defined as the percentage change in operating earnings associated with a given percentage change in sales.

Accepted Answer

A) True 
 B)False

Question 15

From a tax standpoint, in countries where capital gains are taxed, investors should show a preference for stocks compared to investors in countries that do not have capital gains taxes.

Accepted Answer

A) True 
 B)False

Question 16

If a firm uses no debt, the uncertainty inherent in projections of future returns on equity can be described as business risk.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is an advantage of debt financing?

Accepted Answer

A)  Interest charges on debt is very minimal. 
B)  Interest charges on debt are tax deductible. 
C)  Interest charges on debt are based on the net income of the firm. 
D)  The higher the interest charges, the lower the bankruptcy costs. 
E)  Firms that are entirely debt financed have to pay very minimal taxes. 
A)  Interest charges on debt is very minimal. 
B)  Interest charges on debt are tax deductible. 
C)  Interest charges on debt are based on the net income of the firm. 
D)  The higher the interest charges, the lower the bankruptcy costs. 
E)  Firms that are entirely debt financed have to pay very minimal taxes.

Question 18

Which of the following types of businesses can take on more debt than other types of businesses?

Accepted Answer

A)  Single-product firms 
B)  Non-cyclical firms 
C)  Seasonal-product firms 
D)  Small firms 
E)  Cyclical firms 
A)  Single-product firms 
B)  Non-cyclical firms 
C)  Seasonal-product firms 
D)  Small firms 
E)  Cyclical firms

Question 19

According to the trade-off theory, which of the following is the least expensive form of financing?

Accepted Answer

A)  Common stock 
B)  Preferred stock 
C)  Corporate debt 
D)  Retained earnings 
E)  Government subsidies 
A)  Common stock 
B)  Preferred stock 
C)  Corporate debt 
D)  Retained earnings 
E)  Government subsidies

Question 20

One implication of information asymmetry between investors and firm managers is that if the firm raises new capital by issuing debt rather than by selling stock, it will signal that the firm has very good prospects.

Accepted Answer

A) True 
 B)False

According to the signaling theory, which of the following is considered a signal from an investor's point of view?

In 2015, a company had a total debt of $7 million. In 2016, the debt increased to $9 million. The change in earnings per share (EPS) of the company will be a direct result of change in its:

Which of the following is an example of business risk?

According to the signaling theory, what is symmetric information?

If a mature firm announces a new stock offering, the price of its stock will decline. To avoid this, the firm should _____.

If a firm with favorable prospects sells new shares, _____.

With which of the followingis a firm's target capital structure consistent?

A degree of operating leverage of 1.5 times indicates that _____.

The fact that interest is tax-deductible makes corporate debt less expensive than common stock or preferred stock.

Which of the following assumptions outlined by Modigliani and Miller (MM) theory is realistic?

As a general rule, the optimal capital structure is the one that:

Which of the following intensifies the business risk borne by the common stockholders of a firm?

The optimal capital structure will always be lower than the debt/assets ratio that maximizes the _____.

The degree of operating leverage is defined as the percentage change in operating earnings associated with a given percentage change in sales.

From a tax standpoint, in countries where capital gains are taxed, investors should show a preference for stocks compared to investors in countries that do not have capital gains taxes.

If a firm uses no debt, the uncertainty inherent in projections of future returns on equity can be described as business risk.

Which of the following is an advantage of debt financing?

Which of the following types of businesses can take on more debt than other types of businesses?

According to the trade-off theory, which of the following is the least expensive form of financing?

One implication of information asymmetry between investors and firm managers is that if the firm raises new capital by issuing debt rather than by selling stock, it will signal that the firm has very good prospects.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

Exam 12: Capital Structure

According to the signaling theory, which of the following is considered a signal from an investor's point of view?

In 2015, a company had a total debt of $7 million. In 2016, the debt increased to $9 million. The change in earnings per share (EPS) of the company will be a direct result of change in its:

Which of the following is an example of business risk?

According to the signaling theory, what is symmetric information?

If a mature firm announces a new stock offering, the price of its stock will decline. To avoid this, the firm should _____.

If a firm with favorable prospects sells new shares, _____.

With which of the followingis a firm's target capital structure consistent?

A degree of operating leverage of 1.5 times indicates that _____.

The fact that interest is tax-deductible makes corporate debt less expensive than common stock or preferred stock.

Which of the following assumptions outlined by Modigliani and Miller (MM) theory is realistic?

As a general rule, the optimal capital structure is the one that:

Which of the following intensifies the business risk borne by the common stockholders of a firm?

The optimal capital structure will always be lower than the debt/assets ratio that maximizes the _____.

The degree of operating leverage is defined as the percentage change in operating earnings associated with a given percentage change in sales.

From a tax standpoint, in countries where capital gains are taxed, investors should show a preference for stocks compared to investors in countries that do not have capital gains taxes.

If a firm uses no debt, the uncertainty inherent in projections of future returns on equity can be described as business risk.

Which of the following is an advantage of debt financing?

Which of the following types of businesses can take on more debt than other types of businesses?

According to the trade-off theory, which of the following is the least expensive form of financing?

One implication of information asymmetry between investors and firm managers is that if the firm raises new capital by issuing debt rather than by selling stock, it will signal that the firm has very good prospects.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters