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

For any firm's given growth strategy, its dividend decision directly affects its capital structure decision.

Accepted Answer

A) True 
 B)False

Question 3

Corporate debt as a percentage of GDP grew from around ______ in 1970 to nearly ______ in 2007. Too historical

Accepted Answer

A) 35%; 50% 
B) 40%; 55% 
C) 45%; 60% 
D) 50%; 60% 
A) 35%; 50% 
B) 40%; 55% 
C) 45%; 60% 
D) 50%; 60%

Question 4

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 5

A firm's business risk is measured by the variability in which one of the following over time:

Accepted Answer

A) net sales 
B) total assets 
C) operating income (EBIT) 
D) net income 
A) net sales 
B) total assets 
C) operating income (EBIT) 
D) net income

Question 6

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 7

The internal and sustainable growth rate relationships suggest that there are three measurable influences on growth.These include all of the following except:

Accepted Answer

A) asset policy 
B) dividend policy 
C) profitability 
D) the firm's capital structure 
A) asset policy 
B) dividend policy 
C) profitability 
D) the firm's capital structure

Question 8

A firm's mix of debt and equity defines the firm's:

Accepted Answer

A) capital structure 
B) working capital 
C) net working capital 
D) degree of operating leverage 
A) capital structure 
B) working capital 
C) net working capital 
D) degree of operating leverage

Question 9

All of the following components are needed to calculate the sustainable growth rate except:

Accepted Answer

A) return on assets 
B) retention rate 
C) return on equity 
D) all are needed 
A) return on assets 
B) retention rate 
C) return on equity 
D) all are needed

Question 10

All of the following statements are correct except:

Accepted Answer

A) 	The firm’s optimum debt/equity mix minimizes 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 minimizes 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 11

A company experienced a 12 % increase in earnings before interest and taxes and a 3 % increase in sales.What is the degree of operating leverage for this company?

Accepted Answer

A) 36 
B) 6 
C) 4 
D) none of the above 
A) 36 
B) 6 
C) 4 
D) none of the above

Question 12

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 13

All of the following statements are correct except:

Accepted Answer

A) A firm's business risk is measured by its variability in EPS 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 interest expense. 
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 retention rate. 
E) None of the above statements are correct.
Too many clones 
A) A firm's business risk is measured by its variability in EPS 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 interest expense. 
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 retention rate. 
E) None of the above statements are correct.
Too many clones

Question 14

Which of the following is a different concept from the other three?

Accepted Answer

A) required rate of return 
B) cost of capital 
C) discount rate 
D) net profit margin 
A) required rate of return 
B) cost of capital 
C) discount rate 
D) net profit margin

Question 15

If a firm pays out 30% of its earnings as dividends and has averaged a 20 percent return on assets, how quickly can the firm grow without needing to secure outside funding sources?

Accepted Answer

A) 6.4%. 
B) 10.2%. 
C) 14.3%. 
D) 20.0%. 
E) none of the above.
Too many clones 
A) 6.4%. 
B) 10.2%. 
C) 14.3%. 
D) 20.0%. 
E) none of the above.
Too many clones

Question 16

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 17

Using the constant dividend growth model, which of the following components not be considered?

Accepted Answer

A) current stock price 
B) dividend growth rate 
C) risk-free rate 
D) all the above are considered in the constant dividend growth model 
A) current stock price 
B) dividend growth rate 
C) risk-free rate 
D) all the above are considered in the constant dividend growth model

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) Unlike debt and preferred stock, cash flows from common equity are not fixed or known beforehand and their risk is harder to evaluate. 
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) Unlike debt and preferred stock, cash flows from common equity are not fixed or known beforehand and their risk is harder to evaluate. 
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 20

If a firm pays out 3020% 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) 2019.0%. 
E) none of the above. 
A) 6.4%. 
B) 10.2%. 
C) 16.3%. 
D) 2019.0%. 
E) none of the above.

All of the following statements are correct except:

For any firm's given growth strategy, its dividend decision directly affects its capital structure decision.

Corporate debt as a percentage of GDP grew from around in 1970 to nearly in 2007. Too historical

A firm's business risk is measured by the variability in which one of the following over time:

All of the following statements are correct except:

The internal and sustainable growth rate relationships suggest that there are three measurable influences on growth.These include all of the following except:

A firm's mix of debt and equity defines the firm's:

All of the following components are needed to calculate the sustainable growth rate except:

All of the following statements are correct except:

A company experienced a 12 % increase in earnings before interest and taxes and a 3 % increase in sales.What is the degree of operating leverage for this company?

The cost of retained earnings is:

All of the following statements are correct except:

Which of the following is a different concept from the other three?

If a firm pays out 30% of its earnings as dividends and has averaged a 20 percent return on assets, how quickly can the firm grow without needing to secure outside funding sources?

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

Using the constant dividend growth model, which of the following components not be considered?

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

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

If a firm pays out 3020% 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?

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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

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Exam 18: Capital Structure and the Cost of Capital

All of the following statements are correct except:

For any firm's given growth strategy, its dividend decision directly affects its capital structure decision.

Corporate debt as a percentage of GDP grew from around ______ in 1970 to nearly ______ in 2007. Too historical

A firm's business risk is measured by the variability in which one of the following over time:

All of the following statements are correct except:

The internal and sustainable growth rate relationships suggest that there are three measurable influences on growth.These include all of the following except:

A firm's mix of debt and equity defines the firm's:

All of the following components are needed to calculate the sustainable growth rate except:

All of the following statements are correct except:

A company experienced a 12 % increase in earnings before interest and taxes and a 3 % increase in sales.What is the degree of operating leverage for this company?

The cost of retained earnings is:

All of the following statements are correct except:

Which of the following is a different concept from the other three?

If a firm pays out 30% of its earnings as dividends and has averaged a 20 percent return on assets, how quickly can the firm grow without needing to secure outside funding sources?

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

Using the constant dividend growth model, which of the following components not be considered?

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

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

If a firm pays out 3020% 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?

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

Corporate debt as a percentage of GDP grew from around in 1970 to nearly in 2007. Too historical