Question 1

Stockholders' expected return on a stock priced at $25 per share with zero-growth dividends of $4.00 is:

Accepted Answer

A)  6.25%. 
B)  13.64%. 
C)  16.00%. 
D)  21.00%. 
A)  6.25%. 
B)  13.64%. 
C)  16.00%. 
D)  21.00%.

Question 2

Calculate the required return risk premium on the common stock before the refinancing.

Accepted Answer

r_equity = r_assets = 10

Question 3

Debt financing affects neither the operating risk nor the business risk of the firm.

Accepted Answer

A) True 
 B)False

Question 4

As a firm's debt/equity ratio approaches zero,the firm's expected return on equity approaches:

Accepted Answer

A)  the expected return on debt. 
B)  the expected return on assets. 
C)  its maximum. 
D)  zero. 
A)  the expected return on debt. 
B)  the expected return on assets. 
C)  its maximum. 
D)  zero.

Question 5

What can be promised by loan covenants? What cannot be ensured by loan covenants?

Accepted Answer

The company knows that lenders will dema

Question 6

What is the return on equity for a firm with 15% return on assets,10% return on debt,and a .75 debt/equity ratio?

Accepted Answer

A)  18.75% 
B)  20.00% 
C)  23.75% 
D)  26.25% 
A)  18.75% 
B)  20.00% 
C)  23.75% 
D)  26.25%

Question 7

Which of the following lists presents the order of financing from most preferred to least preferred according to the pecking order theory?

Accepted Answer

A)  debt issue, stock issue, internally generated funds. 
B)  internally generated funds, debt issue, stock issue. 
C)  stock issue, internally generated funds, debt issue. 
D)  internally generated funds, stock issue, debt issue. 
A)  debt issue, stock issue, internally generated funds. 
B)  internally generated funds, debt issue, stock issue. 
C)  stock issue, internally generated funds, debt issue. 
D)  internally generated funds, stock issue, debt issue.

Question 8

Under MM II assumptions,the expected return on equity is equal to the expected return on assets for a levered firm.

Accepted Answer

A) True 
 B)False

Question 9

A firm has an expected return on equity of 14% and an after-tax cost of debt of 6%.What debt-equity ratio should be used in order to keep the WACC at 10%?

Accepted Answer

A)  1.00 
B)  0.75 
C)  0.50 
D)  0.25 
A)  1.00 
B)  0.75 
C)  0.50 
D)  0.25

Question 10

A firm's capital structure is represented by its mix of:

Accepted Answer

A)  Assets. 
B)  Debts and equity. 
C)  assets and liabilities. 
D)  assets, liabilities and equity. 
A)  Assets. 
B)  Debts and equity. 
C)  assets and liabilities. 
D)  assets, liabilities and equity.

Question 11

When taxes are ignored,which of the following can be used to calculate the weighted-average cost of capital?

Accepted Answer

A)  ratio of expected operating income to book value of all securities. 
B)  the expected return on equity times the debt-equity ratio. 
C)  ratio of expected operating income to market value of all securities. 
D)  the required return on equity plus the required return on debt. 
A)  ratio of expected operating income to book value of all securities. 
B)  the expected return on equity times the debt-equity ratio. 
C)  ratio of expected operating income to market value of all securities. 
D)  the required return on equity plus the required return on debt.

Question 12

According to MM,an increase in expected earnings per share can leave the share price unchanged if the:

Accepted Answer

A)  firm's operating risk decreases. 
B)  number of shares is decreased. 
C)  required return on equity increases. 
D)  firm has no financial leverage. 
A)  firm's operating risk decreases. 
B)  number of shares is decreased. 
C)  required return on equity increases. 
D)  firm has no financial leverage.

Question 13

What is the goal of the capital structure decision? What is the financial manager trying to do?

Accepted Answer

The goal is to maximize the overall mark

Question 14

A firm's capital structure refers to the maturity of debt it employs.

Accepted Answer

A) True 
 B)False

Question 15

The pecking-order theory of capital structure suggests the following order of financing:

Accepted Answer

A)  internal financing, debt issue, equity issue. 
B)  internal financing, equity issue, debt issue. 
C)  debt issue, equity issue, internal financing. 
D)  equity issue, internal financing, debt issue. 
A)  internal financing, debt issue, equity issue. 
B)  internal financing, equity issue, debt issue. 
C)  debt issue, equity issue, internal financing. 
D)  equity issue, internal financing, debt issue.

Question 16

The "trade-off theory" of capital structure suggests that firms have an optimal level of debt.

Accepted Answer

A) True 
 B)False

Question 17

What is the proportion of debt financing for a firm that expects a 24% return on equity,a 16% return on assets,and a 12% return on debt? Ignore taxes.

Accepted Answer

A)  54.0% 
B)  60.0% 
C)  66.7% 
D)  75.0% 
A)  54.0% 
B)  60.0% 
C)  66.7% 
D)  75.0%

Question 18

With a tax rate of 35%,calculate the WACC for a firm that pays 10% on its debt,requires an 18% rate of return on its equity,and finances 45% of assets with debt.

Accepted Answer

A)  12.83% 
B)  14.00% 
C)  14.40% 
D)  18.20% 
A)  12.83% 
B)  14.00% 
C)  14.40% 
D)  18.20%

Question 19

Any financial benefit derived from the interest tax shield accrues to the:

Accepted Answer

A)  Bondholders. 
B)  Shareholders. 
C)  bondholders and shareholders, equally. 
D)  shareholders and the federal government. 
A)  Bondholders. 
B)  Shareholders. 
C)  bondholders and shareholders, equally. 
D)  shareholders and the federal government.

Question 20

What is the change in value for a firm with $1 million in equity,$1 million in permanent debt at a 10% interest rate,and a 35% tax rate if MM I is modified to recognize corporate taxes?

Accepted Answer

A)  value increases by $35,000 
B)  value increases by $100,000 
C)  value increases by $350,000 
D)  value increases by $700,000 
A)  value increases by $35,000 
B)  value increases by $100,000 
C)  value increases by $350,000 
D)  value increases by $700,000

Exam 16: Debt and Payout Policy

Stockholders' expected return on a stock priced at $25 per share with zero-growth dividends of $4.00 is:

Calculate the required return risk premium on the common stock before the refinancing.

Debt financing affects neither the operating risk nor the business risk of the firm.

As a firm's debt/equity ratio approaches zero,the firm's expected return on equity approaches:

What can be promised by loan covenants? What cannot be ensured by loan covenants?

What is the return on equity for a firm with 15% return on assets,10% return on debt,and a .75 debt/equity ratio?

Which of the following lists presents the order of financing from most preferred to least preferred according to the pecking order theory?

Under MM II assumptions,the expected return on equity is equal to the expected return on assets for a levered firm.

A firm has an expected return on equity of 14% and an after-tax cost of debt of 6%.What debt-equity ratio should be used in order to keep the WACC at 10%?

A firm's capital structure is represented by its mix of:

When taxes are ignored,which of the following can be used to calculate the weighted-average cost of capital?

According to MM,an increase in expected earnings per share can leave the share price unchanged if the:

What is the goal of the capital structure decision? What is the financial manager trying to do?

A firm's capital structure refers to the maturity of debt it employs.

The pecking-order theory of capital structure suggests the following order of financing:

The "trade-off theory" of capital structure suggests that firms have an optimal level of debt.

What is the proportion of debt financing for a firm that expects a 24% return on equity,a 16% return on assets,and a 12% return on debt? Ignore taxes.

With a tax rate of 35%,calculate the WACC for a firm that pays 10% on its debt,requires an 18% rate of return on its equity,and finances 45% of assets with debt.

Any financial benefit derived from the interest tax shield accrues to the:

What is the change in value for a firm with $1 million in equity,$1 million in permanent debt at a 10% interest rate,and a 35% tax rate if MM I is modified to recognize corporate taxes?

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, IPOs, and Seasoned Offerings

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters