Question 1

All of the following statements are correct except:

Accepted Answer

A) Venture capitalists usually are members of partnerships that consist of a few general partners. 
B) The typical venture capital partnership manages between $50 million and $100 million in assets. 
C) It is common to organize a venture capital fund as publicly listed corporations. 
D) At the end of a fund's life,cash and securities are distributed to the investors. 
E) All of the above statements are correct. 
A) Venture capitalists usually are members of partnerships that consist of a few general partners. 
B) The typical venture capital partnership manages between $50 million and $100 million in assets. 
C) It is common to organize a venture capital fund as publicly listed corporations. 
D) At the end of a fund's life,cash and securities are distributed to the investors. 
E) All of the above statements are correct.

Question 2

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 3

All of the following statements are correct except:

Accepted Answer

A) The pecking order hypothesis is a theory that states managers prefer to use new debt to finance the firm,then retained earnings,and (as a final resort)new equity. 
B) The market timing hypothesis states that firms try to time the equity market by issuing stock when their stock prices are high and repurchasing shares when stock values are low. 
C) The static tradeoff hypothesis states that firms will balance the advantages of debt (its lower cost and tax-deductibility of interest)with its disadvantages (greater possibility of bankruptcy and the value of explicit and implicit bankruptcy costs). 
D) Agency costs reduce the optimal level of debt financing for a firm below the level that would be appropriate if agency costs were zero. 
E) All of the above statements are correct. 
A) The pecking order hypothesis is a theory that states managers prefer to use new debt to finance the firm,then retained earnings,and (as a final resort)new equity. 
B) The market timing hypothesis states that firms try to time the equity market by issuing stock when their stock prices are high and repurchasing shares when stock values are low. 
C) The static tradeoff hypothesis states that firms will balance the advantages of debt (its lower cost and tax-deductibility of interest)with its disadvantages (greater possibility of bankruptcy and the value of explicit and implicit bankruptcy costs). 
D) Agency costs reduce the optimal level of debt financing for a firm below the level that would be appropriate if agency costs were zero. 
E) All of the above statements are correct.

Question 4

The degree of financial leverage may be measured by taking the firm's earnings before interest and taxes and dividing by earnings before taxes.

Accepted Answer

A) True 
 B)False

Question 5

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 6

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) 9.8%. 
B) 3.5%. 
C) 11.8%. 
D) 14.7%. 
E) none of the above. 
A) 9.8%. 
B) 3.5%. 
C) 11.8%. 
D) 14.7%. 
E) none of the above.

Question 7

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. 
E) All of the above statements are correct. 
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. 
E) All of the above statements are correct.

Question 8

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) All the above statements are true. 
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) All the above statements are true.

Question 9

The ratio of long-term debt to GDP for non-financial U.S.corporations declined drastically during the late 1990s.

Accepted Answer

A) True 
 B)False

Question 10

The initial impact of increasing the use of debt is to:

Accepted Answer

A) lower the cost of capital 
B) lower the weight of the debt component 
C) increase the cost of capital 
D) lower the cost of retained earnings 
A) lower the cost of capital 
B) lower the weight of the debt component 
C) increase the cost of capital 
D) lower the cost of retained earnings

Question 11

Ningbo Shipping has issued preferred stock at its $125 per share par value.The stock will pay a $15 annual dividend.The cost of issuing and selling the stock was $4 per share.The cost of Ningbo Shipping preferred stock is:

Accepted Answer

A) 7.2%. 
B) 12.0%. 
C) 12.4%. 
D) 15%. 
E) none of the above. 
A) 7.2%. 
B) 12.0%. 
C) 12.4%. 
D) 15%. 
E) none of the above.

Question 12

The greater the total fixed operating costs of a firm,the greater the degree of operating leverage and the greater the degree of combined leverage.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is most correct?

Accepted Answer

A) The degree of combined leverage measures the sensitivity of earnings per share in EBIT. 
B) A firm's business risk is measured by its variability in earnings per share over time. 
C) A firm's degree of combined leverage is the product of its degree of operating leverage and its degree of financial leverage. 
D) All the above statements are false. 
A) The degree of combined leverage measures the sensitivity of earnings per share in EBIT. 
B) A firm's business risk is measured by its variability in earnings per share over time. 
C) A firm's degree of combined leverage is the product of its degree of operating leverage and its degree of financial leverage. 
D) All the above statements are false.

Question 14

The cost of debt:

Accepted Answer

A) is typically higher than the cost of preferred stock 
B) must be adjusted to an after-tax cost 
C) is higher than the cost of retained earnings 
D) is the lowest component cost because corporations can deduct 70 percent of the interest expense 
A) is typically higher than the cost of preferred stock 
B) must be adjusted to an after-tax cost 
C) is higher than the cost of retained earnings 
D) is the lowest component cost because corporations can deduct 70 percent of the interest expense

Question 15

All of the following statements are correct except:

Accepted Answer

A) EBIT/EPS analysis allows managers to see how different capital structures affect the earnings and risk levels of their firms. 
B) EBIT/EPS analysis shows the graphical relationship between a firm's operating earnings,or earnings before interest and taxes (EBIT),and earnings per share (EPS). 
C) EBIT/EPS analysis suggests that at some EBIT level,a firm will be indifferent between the two capital structures,inasmuch as they result in the same earnings per share. 
D) EBIT/eps analysis shows the ranges of EBIT where a firm may prefer one capital structure over another so that the firm may decide to increase or decrease its financial leverage depending on whether its expected EBIT is above or below the indifference EBIT level. 
E) All of the above statements are correct. 
A) EBIT/EPS analysis allows managers to see how different capital structures affect the earnings and risk levels of their firms. 
B) EBIT/EPS analysis shows the graphical relationship between a firm's operating earnings,or earnings before interest and taxes (EBIT),and earnings per share (EPS). 
C) EBIT/EPS analysis suggests that at some EBIT level,a firm will be indifferent between the two capital structures,inasmuch as they result in the same earnings per share. 
D) EBIT/eps analysis shows the ranges of EBIT where a firm may prefer one capital structure over another so that the firm may decide to increase or decrease its financial leverage depending on whether its expected EBIT is above or below the indifference EBIT level. 
E) All of the above statements are correct.

Question 16

The cost of debt represents the minimum acceptable rate of return to a firm on a project of average risk.

Accepted Answer

A) True 
 B)False

Question 17

Ningbo Shipping has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year.The growth rate in dividends has been 5 percent and this growth is expected to continue indefinitely.Based on this information,the cost of the firm's common stock equity is

Accepted Answer

A) 5%. 
B) 8%. 
C) 10%. 
D) 13%. 
E) none of the above. 
A) 5%. 
B) 8%. 
C) 10%. 
D) 13%. 
E) none of the above.

Question 18

The minimum acceptable rate of return for a project is the return that generates sufficient cash flow to pay investors their expected return.

Accepted Answer

A) True 
 B)False

Question 19

If a firm has current earnings per share of $2 and a degree of financial leverage of 4,a 10% increase in sales would result in earnings per share of:

Accepted Answer

A) $2.80 
B) $8 
C) $2.20 
D) cannot tell from this information 
A) $2.80 
B) $8 
C) $2.20 
D) cannot tell from this information

Question 20

The after-tax cost of debt for a firm in the 35% tax bracket with a before-tax cost of debt of 6% is:

Accepted Answer

A) 6% 
B) 2.1% 
C) 3.9% 
D) cannot tell from this information 
A) 6% 
B) 2.1% 
C) 3.9% 
D) cannot tell from this information

All of the following statements are correct except:

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

All of the following statements are correct except:

The degree of financial leverage may be measured by taking the firm's earnings before interest and taxes and dividing by earnings before taxes.

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.

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?

All of the following statements are correct except:

Which of the following statements is false?

The ratio of long-term debt to GDP for non-financial U.S.corporations declined drastically during the late 1990s.

The initial impact of increasing the use of debt is to:

Ningbo Shipping has issued preferred stock at its $125 per share par value.The stock will pay a $15 annual dividend.The cost of issuing and selling the stock was $4 per share.The cost of Ningbo Shipping preferred stock is:

The greater the total fixed operating costs of a firm,the greater the degree of operating leverage and the greater the degree of combined leverage.

Which of the following statements is most correct?

The cost of debt:

All of the following statements are correct except:

The cost of debt represents the minimum acceptable rate of return to a firm on a project of average risk.

The minimum acceptable rate of return for a project is the return that generates sufficient cash flow to pay investors their expected return.

If a firm has current earnings per share of $2 and a degree of financial leverage of 4,a 10% increase in sales would result in earnings per share of:

The after-tax cost of debt for a firm in the 35% tax bracket with a before-tax cost of debt of 6% is:

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Exam 18: Capital Structure and the Cost of Capital

All of the following statements are correct except:

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

All of the following statements are correct except:

The degree of financial leverage may be measured by taking the firm's earnings before interest and taxes and dividing by earnings before taxes.

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.

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?

All of the following statements are correct except:

Which of the following statements is false?

The ratio of long-term debt to GDP for non-financial U.S.corporations declined drastically during the late 1990s.

The initial impact of increasing the use of debt is to:

Ningbo Shipping has issued preferred stock at its $125 per share par value.The stock will pay a $15 annual dividend.The cost of issuing and selling the stock was $4 per share.The cost of Ningbo Shipping preferred stock is:

The greater the total fixed operating costs of a firm,the greater the degree of operating leverage and the greater the degree of combined leverage.

Which of the following statements is most correct?

The cost of debt:

All of the following statements are correct except:

The cost of debt represents the minimum acceptable rate of return to a firm on a project of average risk.

The minimum acceptable rate of return for a project is the return that generates sufficient cash flow to pay investors their expected return.

If a firm has current earnings per share of $2 and a degree of financial leverage of 4,a 10% increase in sales would result in earnings per share of:

The after-tax cost of debt for a firm in the 35% tax bracket with a before-tax cost of debt of 6% is:

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