Question 1

As a general rule, the capital structure that maximizes stock price also:

Accepted Answer

A) minimizes the weighted average cost of capital 
B) maximizes the weighted average cost of capital 
C) minimizes the required rate of return on equity 
D) maximizes the cost of debt 
A) minimizes the weighted average cost of capital 
B) maximizes the weighted average cost of capital 
C) minimizes the required rate of return on equity 
D) maximizes the cost of debt

Question 2

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 earnings per share 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.
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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 earnings per share 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.
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Question 3

EBIT/EPS analysis shows the ranges of EBIT where a firm may prefer one capital structure over another.

Accepted Answer

A) True 
 B)False

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

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 6

The ratio of debt to stock market equity has generally been highest for the smallest of U.S.firms.

Accepted Answer

A) True 
 B)False

Question 7

Financial theory favors the method using the market values of the firm's debt and equity to compare target and actual weights.

Accepted Answer

A) True 
 B)False

Question 8

The firm's optimum debt/equity mix maximizes the firm's cost of capital, which in turn will help the firm to maximize shareholder wealth.

Accepted Answer

A) True 
 B)False

Question 9

The initial impact of increasing the use of debt for a firm which had no prior debt financing 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 10

Financial risk affects the bottom half of the income statement.

Accepted Answer

A) True 
 B)False

Question 11

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 12

Because the cost of capital is used to evaluate future investment proposals, it is important to include flotation costs because such costs would be incurred if a firm were to raise new capital to fund proposed projects.

Accepted Answer

A) True 
 B)False

Question 13

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

Question 14

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

Question 15

Which of the following is not an influence affecting a firm's capital structure choices?

Accepted Answer

A) corporate control 
B) maturity matching 
C) timing 
D) all the above affect a firm's capital structure choices 
A) corporate control 
B) maturity matching 
C) timing 
D) all the above affect a firm's capital structure choices

Question 16

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 17

The firm's optimum debt/equity mix minimizes the firm's cost of capital, which in turn will help the firm to maximize shareholder wealth.

Accepted Answer

A) True 
 B)False

Question 18

All of the following statements are correct except:

Accepted Answer

A) Relevant cash flows are incremental after-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 after-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 19

Which of the following phrases make the statement false? As a firm increases its operating leverage for a given quantity of output, this:

Accepted Answer

A) decreases its financial leverage 
B) changes its operating cost structure 
C) increases its business risk 
D) increases the variability on earnings per share 
A) decreases its financial leverage 
B) changes its operating cost structure 
C) increases its business risk 
D) increases the variability on earnings per share

Question 20

A decrease in contractual managers' salaries will result in:

Accepted Answer

A) an increase in the degree of financial leverage 
B) a decrease in the degree of financial leverage 
C) no change in the degree of financial leverage 
A) an increase in the degree of financial leverage 
B) a decrease in the degree of financial leverage 
C) no change in the degree of financial leverage

As a general rule, the capital structure that maximizes stock price also:

All of the following statements are correct except:

EBIT/EPS analysis shows the ranges of EBIT where a firm may prefer one capital structure over another.

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

All of the following statements are correct except:

The ratio of debt to stock market equity has generally been highest for the smallest of U.S.firms.

Financial theory favors the method using the market values of the firm's debt and equity to compare target and actual weights.

The firm's optimum debt/equity mix maximizes the firm's cost of capital, which in turn will help the firm to maximize shareholder wealth.

The initial impact of increasing the use of debt for a firm which had no prior debt financing is to:

Financial risk affects the bottom half of the income statement.

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.

Because the cost of capital is used to evaluate future investment proposals, it is important to include flotation costs because such costs would be incurred if a firm were to raise new capital to fund proposed projects.

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?

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

Which of the following is not an influence affecting a firm's capital structure choices?

A firm's business risk is affected by:

The firm's optimum debt/equity mix minimizes the firm's cost of capital, which in turn will help the firm to maximize shareholder wealth.

All of the following statements are correct except:

Which of the following phrases make the statement false? As a firm increases its operating leverage for a given quantity of output, this:

A decrease in contractual managers' salaries will result in:

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Exam 18: Capital Structure and the Cost of Capital

As a general rule, the capital structure that maximizes stock price also:

All of the following statements are correct except:

EBIT/EPS analysis shows the ranges of EBIT where a firm may prefer one capital structure over another.

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

All of the following statements are correct except:

The ratio of debt to stock market equity has generally been highest for the smallest of U.S.firms.

Financial theory favors the method using the market values of the firm's debt and equity to compare target and actual weights.

The firm's optimum debt/equity mix maximizes the firm's cost of capital, which in turn will help the firm to maximize shareholder wealth.

The initial impact of increasing the use of debt for a firm which had no prior debt financing is to:

Financial risk affects the bottom half of the income statement.

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.

Because the cost of capital is used to evaluate future investment proposals, it is important to include flotation costs because such costs would be incurred if a firm were to raise new capital to fund proposed projects.

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?

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

Which of the following is not an influence affecting a firm's capital structure choices?

A firm's business risk is affected by:

The firm's optimum debt/equity mix minimizes the firm's cost of capital, which in turn will help the firm to maximize shareholder wealth.

All of the following statements are correct except:

Which of the following phrases make the statement false? As a firm increases its operating leverage for a given quantity of output, this:

A decrease in contractual managers' salaries will result in:

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