Question 1

Given the conflict between risk and return,the purpose of capital structure management is to find the debt level:

Accepted Answer

A) that will always be kept below the equity level 
B) where the price of company stock is maximized 
C) that most adequately supports corporate goals 
D) that is equal in dollar value to the equity level 
A) that will always be kept below the equity level 
B) where the price of company stock is maximized 
C) that most adequately supports corporate goals 
D) that is equal in dollar value to the equity level

Question 2

All of the following statements are correct except:

Accepted Answer

A) The firm's optimum debt/equity mix maximizes the firm's cost of capital,which in turn helps the firm to maximize shareholder wealth 
B) A firm's mix of debt and equity used to finance its assets defines the firm's capital structure. 
C) A nonoptimal capital structure with either too much or too little debt leads to higher financing costs,and the firm will likely reject some capital budgeting projects that could have increased shareholder wealth with an optimal financing mix. 
D) A project's NPV represents the increase in shareholders' wealth from undertaking a project;thus,a lower weighted average cost of capital gives higher project net present values and results in higher levels of shareholder wealth. 
E) All of the above statements are correct. 
A) The firm's optimum debt/equity mix maximizes the firm's cost of capital,which in turn helps the firm to maximize shareholder wealth 
B) A firm's mix of debt and equity used to finance its assets defines the firm's capital structure. 
C) A nonoptimal capital structure with either too much or too little debt leads to higher financing costs,and the firm will likely reject some capital budgeting projects that could have increased shareholder wealth with an optimal financing mix. 
D) A project's NPV represents the increase in shareholders' wealth from undertaking a project;thus,a lower weighted average cost of capital gives higher project net present values and results in higher levels of shareholder wealth. 
E) All of the above statements are correct.

Question 3

The cost of retained earnings is:

Accepted Answer

A) the cheapest component cost 
B) zero because the firm does not have to pay interest or dividend to itself 
C) always less than the cost of new common stock 
D) typically cheaper than the cost of preferred stock 
A) the cheapest component cost 
B) zero because the firm does not have to pay interest or dividend to itself 
C) always less than the cost of new common stock 
D) typically cheaper than the cost of preferred stock

Question 4

Corporate investors can exempt all preferred dividend income from income taxes.

Accepted Answer

A) True 
 B)False

Question 5

In estimating the cost of equity,the rate of return on U.S.Treasury bills is often used as a proxy for the risk free rate of return.

Accepted Answer

A) True 
 B)False

Question 6

The degree of financial leverage measures the sensitivity of earnings per share to sales.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is not used in the weighted average cost of capital equation?

Accepted Answer

A) cost of retained earnings 
B) weight of debt 
C) corporate income tax rate 
D) marginal tax rate 
A) cost of retained earnings 
B) weight of debt 
C) corporate income tax rate 
D) marginal tax rate

Question 8

Operating leverage is affected by such items as rental payments,contractual employee salaries,and general and administrative overhead expenses.

Accepted Answer

A) True 
 B)False

Question 9

If firms select the proportion of debt in their capital structures in order to balance the benefits of tax-deducible interest payments with opportunity costs,this would support the notion of:

Accepted Answer

A) the static trade-off hypothesis 
B) pecking order theory 
C) efficient markets hypothesis 
D) none of the above 
A) the static trade-off hypothesis 
B) pecking order theory 
C) efficient markets hypothesis 
D) none of the above

Question 10

Business risk is measured by the degree of financial leverage.

Accepted Answer

A) True 
 B)False

Question 11

The internal growth rate measures how quickly a firm can increase its asset base over the next year without raising outside funds.

Accepted Answer

A) True 
 B)False

Question 12

The degree of combined leverage is measured by adding the degree of operating leverage and degree of financial leverage.

Accepted Answer

A) True 
 B)False

Question 13

All of the following statements are correct except:

Accepted Answer

A) Relevant cash flows are incremental before-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 after-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. 
E) All of the above statements are correct. 
A) Relevant cash flows are incremental before-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 after-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. 
E) All of the above statements are correct.

Question 14

Which of the following statements is false?

Accepted Answer

A) Other factors being constant,higher fixed costs mean a higher operating leverage. 
B) Corporate bonds and notes provide no voting rights. 
C) The cost of debt is the minimum acceptable rate of return to a firm on a project of average risk. 
D) All of the above statements are true. 
A) Other factors being constant,higher fixed costs mean a higher operating leverage. 
B) Corporate bonds and notes provide no voting rights. 
C) The cost of debt is the minimum acceptable rate of return to a firm on a project of average risk. 
D) All of the above statements are true.

Question 15

All of the following methods can be used to estimate the cost of equity except:

Accepted Answer

A) Like debt and preferred stock,cash flows from common equity are fixed. 
B) Firms have two sources of common equity,retained earnings and new stock issues,and thus two costs of common equity. 
C) From the shareholders' perspective,the opportunity cost of retained earnings is the return the shareholders could earn by investing the funds in assets whose risk is similar to that of the firm. 
D) If the firm cannot invest its retained earnings to achieve a sufficient risk-adjusted return,shareholders would be better off receiving 100 percent of its net income as dividends. 
E) All of the above statements are correct. 
A) Like debt and preferred stock,cash flows from common equity are fixed. 
B) Firms have two sources of common equity,retained earnings and new stock issues,and thus two costs of common equity. 
C) From the shareholders' perspective,the opportunity cost of retained earnings is the return the shareholders could earn by investing the funds in assets whose risk is similar to that of the firm. 
D) If the firm cannot invest its retained earnings to achieve a sufficient risk-adjusted return,shareholders would be better off receiving 100 percent of its net income as dividends. 
E) All of the above statements are correct.

Question 16

The cost of capital may be estimated from the historical cost of raising debt and equity capital.

Accepted Answer

A) True 
 B)False

Question 17

If a firm pays out 30% of its earnings as dividends and has averaged a 20 percent return on equity,how quickly can the firm grow while maintaining a constant debt to equity mix?

Accepted Answer

A) 6.4%. 
B) 10.2%. 
C) 16.3%. 
D) 20.0%. 
E) none of the above. 
A) 6.4%. 
B) 10.2%. 
C) 16.3%. 
D) 20.0%. 
E) none of the above.

Question 18

A firm's business risk is affected by:

Accepted Answer

A) business cycle 
B) the firm's operating leverage 
C) competitive pressures 
D) all the above 
A) business cycle 
B) the firm's operating leverage 
C) competitive pressures 
D) all the above

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

What is Ningbo Shipping's WACC if it's after tax cost of debt is 3.5%,it's cost of retained earnings is 14%,and the firm's market value of debt is $40 million while the market value of its equity is $60 million?

Accepted Answer

A) 1.8%. 
B) 3.5%. 
C) 11.8%. 
D) 14.7%. 
E) none of the above. 
A) 1.8%. 
B) 3.5%. 
C) 11.8%. 
D) 14.7%. 
E) none of the above.

Given the conflict between risk and return,the purpose of capital structure management is to find the debt level:

All of the following statements are correct except:

The cost of retained earnings is:

Corporate investors can exempt all preferred dividend income from income taxes.

In estimating the cost of equity,the rate of return on U.S.Treasury bills is often used as a proxy for the risk free rate of return.

The degree of financial leverage measures the sensitivity of earnings per share to sales.

Which of the following is not used in the weighted average cost of capital equation?

Operating leverage is affected by such items as rental payments,contractual employee salaries,and general and administrative overhead expenses.

If firms select the proportion of debt in their capital structures in order to balance the benefits of tax-deducible interest payments with opportunity costs,this would support the notion of:

Business risk is measured by the degree of financial leverage.

The internal growth rate measures how quickly a firm can increase its asset base over the next year without raising outside funds.

The degree of combined leverage is measured by adding the degree of operating leverage and degree of financial leverage.

All of the following statements are correct except:

Which of the following statements is false?

All of the following methods can be used to estimate the cost of equity except:

The cost of capital may be estimated from the historical cost of raising debt and equity capital.

If a firm pays out 30% of its earnings as dividends and has averaged a 20 percent return on equity,how quickly can the firm grow while maintaining a constant debt to equity mix?

A firm's business risk is affected by:

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

What is Ningbo Shipping's WACC if it's after tax cost of debt is 3.5%,it's cost of retained earnings is 14%,and the firm's market value of debt is $40 million while the market value of its equity is $60 million?

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 Valuation

Securities 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

Exam 18: Capital Structure and the Cost of Capital

Given the conflict between risk and return,the purpose of capital structure management is to find the debt level:

All of the following statements are correct except:

The cost of retained earnings is:

Corporate investors can exempt all preferred dividend income from income taxes.

In estimating the cost of equity,the rate of return on U.S.Treasury bills is often used as a proxy for the risk free rate of return.

The degree of financial leverage measures the sensitivity of earnings per share to sales.

Which of the following is not used in the weighted average cost of capital equation?

Operating leverage is affected by such items as rental payments,contractual employee salaries,and general and administrative overhead expenses.

If firms select the proportion of debt in their capital structures in order to balance the benefits of tax-deducible interest payments with opportunity costs,this would support the notion of:

Business risk is measured by the degree of financial leverage.

The internal growth rate measures how quickly a firm can increase its asset base over the next year without raising outside funds.

The degree of combined leverage is measured by adding the degree of operating leverage and degree of financial leverage.

All of the following statements are correct except:

Which of the following statements is false?

All of the following methods can be used to estimate the cost of equity except:

The cost of capital may be estimated from the historical cost of raising debt and equity capital.

If a firm pays out 30% of its earnings as dividends and has averaged a 20 percent return on equity,how quickly can the firm grow while maintaining a constant debt to equity mix?

A firm's business risk is affected by:

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

What is Ningbo Shipping's WACC if it's after tax cost of debt is 3.5%,it's cost of retained earnings is 14%,and the firm's market value of debt is $40 million while the market value of its equity is $60 million?

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 Valuation

Securities 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