Question 1

As a general rule,the capital structure that

Accepted Answer

A)  Maximizes expected EPS also maximizes the price per share of common stock. 
B)  Minimizes the interest rate on debt also maximizes the expected EPS. 
C)  Minimizes the required rate on equity also maximizes the stock price. 
D)  Maximizes the price per share of common stock also minimizes the weighted average cost of capital. 
E)  None of the above. 
A)  Maximizes expected EPS also maximizes the price per share of common stock. 
B)  Minimizes the interest rate on debt also maximizes the expected EPS. 
C)  Minimizes the required rate on equity also maximizes the stock price. 
D)  Maximizes the price per share of common stock also minimizes the weighted average cost of capital. 
E)  None of the above.

Question 2

The optimal dividend policy for a firm strikes a balance between payment of current dividends and retention of earnings for future growth,and results in the maximization of stock price.

Accepted Answer

A) True 
 B)False

Question 3

An all equity firm has some risk inherent in its operations.When the firm decides to finance some of its operations with debt,it exposes itself to financial risk and it increases its business risk.

Accepted Answer

A) True 
 B)False

Question 4

Because creditors can foresee,to at least some extent,the costs of bankruptcy,they charge an interest rate that has a premium built into it to compensate for the present value of bankruptcy costs.

Accepted Answer

A) True 
 B)False

Question 5

As long as a firm is near its target capital structure it will not have to concern itself with financial flexibility.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is most correct?

Accepted Answer

A)  The optimal capital structure minimizes the WACC. 
B)  If the after-tax cost of equity financing exceeds the after-tax cost of debt financing,firms are always able to reduce their WACC by increasing the amount of debt in their capital structure. 
C)  Increasing the amount of debt in a firm's capital structure is likely to increase the cost of both debt and equity financing. 
D)  Answers a and c are both correct. 
E)  Answers b and c are both correct. 
A)  The optimal capital structure minimizes the WACC. 
B)  If the after-tax cost of equity financing exceeds the after-tax cost of debt financing,firms are always able to reduce their WACC by increasing the amount of debt in their capital structure. 
C)  Increasing the amount of debt in a firm's capital structure is likely to increase the cost of both debt and equity financing. 
D)  Answers a and c are both correct. 
E)  Answers b and c are both correct.

Question 7

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 8

The presence of asymmetric information affects capital structure because it can affect managers' financing decisions.

Accepted Answer

A) True 
 B)False

Question 9

If a firm adheres strictly to the residual dividend model,then if its optimal capital budget requires the use of all earnings for that year (along with new debt according to the optimal debt/total assets ratio),the firm should pay

Accepted Answer

A)  No dividends except out of past retained earnings. 
B)  No dividends to common stockholders. 
C)  Dividends,in effect,out of a new issue of common stock. 
D)  Dividends by borrowing the money (debt). 
E)  Either c or d above could be used. 
A)  No dividends except out of past retained earnings. 
B)  No dividends to common stockholders. 
C)  Dividends,in effect,out of a new issue of common stock. 
D)  Dividends by borrowing the money (debt). 
E)  Either c or d above could be used.

Question 10

If we consider only agency costs associated with the issuance of debt,then this implies that the firm should move toward 100 percent debt financing.

Accepted Answer

A) True 
 B)False

Question 11

Driver Corporation faces an IOS schedule calling for a capital budget of $60 million.Its optimal capital structure is 60 percent equity and 40 percent debt.Its earnings before interest and taxes (EBIT)were $98 million for the year.The firm has $200 million in assets,pays an average of 10 percent on all its debt,and faces a marginal tax rate of 34 percent.If the firm maintains a residual dividend policy and will keep its optimal capital structure intact,what will be the amount of the dividends it pays out after financing its capital budget?

Accepted Answer

A)  $23.4 million 
B)  $59.4 million 
C)  $20.76 million 
D)  $30.0 million 
E)  $0 
A)  $23.4 million 
B)  $59.4 million 
C)  $20.76 million 
D)  $30.0 million 
E)  $0

Question 12

If the Modigliani and Miller hypothesis about dividends is correct,and if one found a group of companies which differed only with respect to dividend policy,which of the following statements would be most correct?

Accepted Answer

A)  The residual dividend model should not be used,because it is inconsistent with the MM dividend hypothesis. 
B)  The total expected return,which in equilibrium is also equal to the required return,would be higher for those companies with lower payout ratios because of the greater risk associated with capital gains versus dividends. 
C)  If the expected total return of each of the sample companies were divided into a dividend yield and a growth rate,and then a scatter diagram (or regression)analysis were undertaken,then the slope of the regression line (or b in the equation D1/P0 = a + b(g))would be equal to +1.0. 
D)  None of the above statements is true. 
E)  All of the above statements are true. 
A)  The residual dividend model should not be used,because it is inconsistent with the MM dividend hypothesis. 
B)  The total expected return,which in equilibrium is also equal to the required return,would be higher for those companies with lower payout ratios because of the greater risk associated with capital gains versus dividends. 
C)  If the expected total return of each of the sample companies were divided into a dividend yield and a growth rate,and then a scatter diagram (or regression)analysis were undertaken,then the slope of the regression line (or b in the equation D1/P0 = a + b(g))would be equal to +1.0. 
D)  None of the above statements is true. 
E)  All of the above statements are true.

Question 13

If investors do,in fact,prefer that firms retain most of their earnings,then firms that want to maximize stock price should hold dividend payments to low levels.

Accepted Answer

A) True 
 B)False

Question 14

Stargell Industries follows a strict residual dividend policy.The company has a capital budget of $3,000,000.It has a target capital structure which consists of 30 percent debt and 70 percent equity.The company forecasts that its net income will be $3,500,000.What will be the company's payout ratio this year?

Accepted Answer

A)  25% 
B)  30% 
C)  35% 
D)  40% 
E)  45% 
A)  25% 
B)  30% 
C)  35% 
D)  40% 
E)  45%

Question 15

It has been shown that a firm's beta ____ an increase in its degree of financial leverage.

Accepted Answer

A)  increases with 
B)  decreases with 
C)  remains constant with 
D)  is not related to 
A)  increases with 
B)  decreases with 
C)  remains constant with 
D)  is not related to

Question 16

The dividend irrelevance theory,proposed by Miller and Modigliani,says that as long as a firm pays a dividend,how much it pays does not affect either its cost of capital or its stock price.

Accepted Answer

A) True 
 B)False

Question 17

Business risk,which is the risk inherent in a firm's assets if it uses less than its optimal amount of debt,is one important influence in the capital structure decision.

Accepted Answer

A) True 
 B)False

Question 18

The Congress Company has identified two methods for producing playing cards.One method involves using a machine having a fixed cost of $10,000 and variable costs of $1.00 per deck of cards.The other method would use a less expensive machine (fixed cost = $5,000),but it would require greater variable costs ($1.50 per deck of cards).If the selling price per deck of cards will be the same under each method,at what level of output will the two methods produce the same net operating income?

Accepted Answer

A)  5,000 decks 
B)  10,000 decks 
C)  15,000 decks 
D)  20,000 decks 
E)  25,000 decks 
A)  5,000 decks 
B)  10,000 decks 
C)  15,000 decks 
D)  20,000 decks 
E)  25,000 decks

Question 19

The Altman Company has a debt-to-assets ratio of 33.33 percent,and it needs to raise $100,000 to expand.Management feels that an optimal debt-to-assets ratio would be 16.67 percent.Sales are currently $750,000,and the total assets turnover is 7.5.How should the expansion be financed so as to produce the desired debt-to-assets ratio?

Accepted Answer

A)  Finance it all with equity. 
B)  Finance it all with debt. 
C)  Finance 20% debt,80% equity. 
D)  Finance 40% debt,60% equity. 
E)  Finance 50% debt,50% equity. 
A)  Finance it all with equity. 
B)  Finance it all with debt. 
C)  Finance 20% debt,80% equity. 
D)  Finance 40% debt,60% equity. 
E)  Finance 50% debt,50% equity.

Question 20

Which of the following types of dividends is (are)never paid out in the form of cash?

Accepted Answer

A)  Regular dividend. 
B)  Stock dividend. 
C)  Extra dividend. 
D)  Liquidating dividend. 
E)  All of the above are paid in the form of cash. 
A)  Regular dividend. 
B)  Stock dividend. 
C)  Extra dividend. 
D)  Liquidating dividend. 
E)  All of the above are paid in the form of cash.

As a general rule,the capital structure that

The optimal dividend policy for a firm strikes a balance between payment of current dividends and retention of earnings for future growth,and results in the maximization of stock price.

An all equity firm has some risk inherent in its operations.When the firm decides to finance some of its operations with debt,it exposes itself to financial risk and it increases its business risk.

Because creditors can foresee,to at least some extent,the costs of bankruptcy,they charge an interest rate that has a premium built into it to compensate for the present value of bankruptcy costs.

As long as a firm is near its target capital structure it will not have to concern itself with financial flexibility.

Which of the following statements is most correct?

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

The presence of asymmetric information affects capital structure because it can affect managers' financing decisions.

If a firm adheres strictly to the residual dividend model,then if its optimal capital budget requires the use of all earnings for that year (along with new debt according to the optimal debt/total assets ratio),the firm should pay

If we consider only agency costs associated with the issuance of debt,then this implies that the firm should move toward 100 percent debt financing.

If the Modigliani and Miller hypothesis about dividends is correct,and if one found a group of companies which differed only with respect to dividend policy,which of the following statements would be most correct?

If investors do,in fact,prefer that firms retain most of their earnings,then firms that want to maximize stock price should hold dividend payments to low levels.

It has been shown that a firm's beta ____ an increase in its degree of financial leverage.

The dividend irrelevance theory,proposed by Miller and Modigliani,says that as long as a firm pays a dividend,how much it pays does not affect either its cost of capital or its stock price.

Business risk,which is the risk inherent in a firm's assets if it uses less than its optimal amount of debt,is one important influence in the capital structure decision.

Which of the following types of dividends is (are)never paid out in the form of cash?

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

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Exam 14: Capital Structure and Dividend Policy Decisions

As a general rule,the capital structure that

The optimal dividend policy for a firm strikes a balance between payment of current dividends and retention of earnings for future growth,and results in the maximization of stock price.

An all equity firm has some risk inherent in its operations.When the firm decides to finance some of its operations with debt,it exposes itself to financial risk and it increases its business risk.

Because creditors can foresee,to at least some extent,the costs of bankruptcy,they charge an interest rate that has a premium built into it to compensate for the present value of bankruptcy costs.

As long as a firm is near its target capital structure it will not have to concern itself with financial flexibility.

Which of the following statements is most correct?

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

The presence of asymmetric information affects capital structure because it can affect managers' financing decisions.

If a firm adheres strictly to the residual dividend model,then if its optimal capital budget requires the use of all earnings for that year (along with new debt according to the optimal debt/total assets ratio),the firm should pay

If we consider only agency costs associated with the issuance of debt,then this implies that the firm should move toward 100 percent debt financing.

If the Modigliani and Miller hypothesis about dividends is correct,and if one found a group of companies which differed only with respect to dividend policy,which of the following statements would be most correct?

If investors do,in fact,prefer that firms retain most of their earnings,then firms that want to maximize stock price should hold dividend payments to low levels.

It has been shown that a firm's beta ____ an increase in its degree of financial leverage.

The dividend irrelevance theory,proposed by Miller and Modigliani,says that as long as a firm pays a dividend,how much it pays does not affect either its cost of capital or its stock price.

Business risk,which is the risk inherent in a firm's assets if it uses less than its optimal amount of debt,is one important influence in the capital structure decision.

Which of the following types of dividends is (are)never paid out in the form of cash?

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters