Question 1

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 2

All of the following statements are correct except:

Accepted Answer

A) Venture capitalists usually are members of partnerships that consist of thousands of general partners. 
B) The typical venture capital partnership manages between $50 billion and $100 billion in assets. 
C) It is common to organize a venture capital fund as a publicly listed corporation. 
D) At the end of a fund's life, cash and securities are typically donated to charitable causes. 
E) None of the above statements are correct. 
A) Venture capitalists usually are members of partnerships that consist of thousands of general partners. 
B) The typical venture capital partnership manages between $50 billion and $100 billion in assets. 
C) It is common to organize a venture capital fund as a publicly listed corporation. 
D) At the end of a fund's life, cash and securities are typically donated to charitable causes. 
E) None of the above statements are correct.

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 additions to retained earnings to finance the firm, then debt, 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.
Too many clones 
A) The pecking order hypothesis is a theory that states managers prefer to use additions to retained earnings to finance the firm, then debt, 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.
Too many clones

Question 4

A greater percentage of European multinational firms use weighted average costs of capital as their project discount rates than U.S.firms.
Students don't really need to memorize this.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is most correct?

Accepted Answer

A) The degree of combined leverage measures the sensitivity of earnings per share ininto changes 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 ininto changes 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 6

There is no opportunity cost associated with retained earnings.

Accepted Answer

A) True 
 B)False

Question 7

All of the following statements are correct except:

Accepted Answer

A) 	The firm’s optimum debt/equity mix maximizes 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 maximizes 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 8

All of the following statements are correct except:

Accepted Answer

A) The internal growth rate measures how quickly a firm can increase its asset base over the next year without raising outside funds. 
B) The retention rate represents the proportion of every $1 of earnings per share that is retained by the firm; in other words, it is equal to one minus the dividend payout ratio. 
C) The sustainable growth rate measures how quickly the firm can grow when it uses only debt financing to keep its capital structure constant over time. 
D) The internal and sustainable growth rate relationships suggest that there are three measurable influences on growth: dividend policy (as reflected in the retention rate), profitability (as measured by RO
A) , and the firm's capital structure (as measured by the equity multiplier). 
E) All of the above statements are correct. 
A) The internal growth rate measures how quickly a firm can increase its asset base over the next year without raising outside funds. 
B) The retention rate represents the proportion of every $1 of earnings per share that is retained by the firm; in other words, it is equal to one minus the dividend payout ratio. 
C) The sustainable growth rate measures how quickly the firm can grow when it uses only debt financing to keep its capital structure constant over time. 
D) The internal and sustainable growth rate relationships suggest that there are three measurable influences on growth: dividend policy (as reflected in the retention rate), profitability (as measured by RO
A) , and the firm's capital structure (as measured by the equity multiplier). 
E) All of the above statements are correct.

Question 9

Which of the following statements is most correct?

Accepted Answer

A) All component costs in a firm's weighted average cost of capital must reflect after-tax costs, but the only component that requires an adjustment for taxes is the cost of new common stock. 
B) An increase in the marginal corporate tax rate would lower the weighted average cost of capital for the firm, other things held constant. 
C) The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt. 
D) All the above statements are equally true. 
A) All component costs in a firm's weighted average cost of capital must reflect after-tax costs, but the only component that requires an adjustment for taxes is the cost of new common stock. 
B) An increase in the marginal corporate tax rate would lower the weighted average cost of capital for the firm, other things held constant. 
C) The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt. 
D) All the above statements are equally true.

Question 10

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 11

The degree of combined leverage shows us to what degree a percentage change in sales will cause a percentage change in:

Accepted Answer

A) earnings before interest and taxes 
B) pre-tax earnings after tax 
C) earnings per share 
D) gross profit 
A) earnings before interest and taxes 
B) pre-tax earnings after tax 
C) earnings per share 
D) gross profit

Question 12

A firm's financial risk is measured by its variability in EBIT over time.

Accepted Answer

A) True 
 B)False

Question 13

Of the components shown below, which is least likely to be of value in calculating the cost of preferred stock?

Accepted Answer

A) flotation costs per share 
B) book value of a preferred share 
C) dividends per share 
D) initial market price per share 
A) flotation costs per share 
B) book value of a preferred share 
C) dividends per share 
D) initial market price per share

Question 14

All of the following statements regarding capital structure weights in the WACC equation are correct except:

Accepted Answer

A) The weights represent a specific intended financing mix. 
B) These target weights represent a mix of debt and equity that the firm will try to achieve or maintain over the planning horizon. 
C) As much as possible, the target weights should reflect the combination of debt and equity that management believes will maximize the firm's weighted average cost of capital. 
D) The firm should make an effort over time to move toward and maintain its target capital structure mix of debt and equity. 
E) All of the above statements are correct. 
A) The weights represent a specific intended financing mix. 
B) These target weights represent a mix of debt and equity that the firm will try to achieve or maintain over the planning horizon. 
C) As much as possible, the target weights should reflect the combination of debt and equity that management believes will maximize the firm's weighted average cost of capital. 
D) The firm should make an effort over time to move toward and maintain its target capital structure mix of debt and equity. 
E) All of the above statements are correct.

Question 15

EBIT/EPS analysis allows managers to see how different capital structures affect the earnings levels of their firms.

Accepted Answer

A) True 
 B)False

Question 16

The firm's target capital structure is consistent with which of the following?

Accepted Answer

A) minimum risk 
B) maximum earnings per share 
C) minimum weighted average cost of capital 
D) minimum cost of equity 
A) minimum risk 
B) maximum earnings per share 
C) minimum weighted average cost of capital 
D) minimum cost of equity

Question 17

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 18

Firm value is calculated by adding expected cash flow to the firm's cost of capital under each capital structure.

Accepted Answer

A) True 
 B)False

Question 19

A decrease in contractual managers' salaries will result in:

Accepted Answer

A) an increase in the degree of combined leverage 
B) a decrease in the degree of combined leverage 
C) no change in the degree of combined leverage 
D) none of the above 
A) an increase in the degree of combined leverage 
B) a decrease in the degree of combined leverage 
C) no change in the degree of combined leverage 
D) none of the above

Question 20

79100.Ningbo Shipping has determined it can issue preferred stock at $115 per share par value.The stock will pay a $12 annual dividend.The cost of issuing and selling the stock is $3 per share.The cost of the preferred stock is

Accepted Answer

A) 6.4%. 
B) 9.4%. 
C) 10.7%. 
D) 14.7%. 
E) none of the above. 
A) 6.4%. 
B) 9.4%. 
C) 10.7%. 
D) 14.7%. 
E) none of the above.

All of the following statements are correct except:

All of the following statements are correct except:

All of the following statements are correct except:

A greater percentage of European multinational firms use weighted average costs of capital as their project discount rates than U.S.firms. Students don't really need to memorize this.

Which of the following statements is most correct?

There is no opportunity cost associated with retained earnings.

All of the following statements are correct except:

All of the following statements are correct except:

Which of the following statements is most correct?

Which of the following statements is false?

The degree of combined leverage shows us to what degree a percentage change in sales will cause a percentage change in:

A firm's financial risk is measured by its variability in EBIT over time.

Of the components shown below, which is least likely to be of value in calculating the cost of preferred stock?

All of the following statements regarding capital structure weights in the WACC equation are correct except:

EBIT/EPS analysis allows managers to see how different capital structures affect the earnings levels of their firms.

The firm's target capital structure is consistent with which of the following?

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:

Firm value is calculated by adding expected cash flow to the firm's cost of capital under each capital structure.

A decrease in contractual managers' salaries will result in:

79100.Ningbo Shipping has determined it can issue preferred stock at $115 per share par value.The stock will pay a $12 annual dividend.The cost of issuing and selling the stock is $3 per share.The cost of the preferred stock 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

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Exam 18: Capital Structure and the Cost of Capital

All of the following statements are correct except:

All of the following statements are correct except:

All of the following statements are correct except:

A greater percentage of European multinational firms use weighted average costs of capital as their project discount rates than U.S.firms. Students don't really need to memorize this.

Which of the following statements is most correct?

There is no opportunity cost associated with retained earnings.

All of the following statements are correct except:

All of the following statements are correct except:

Which of the following statements is most correct?

Which of the following statements is false?

The degree of combined leverage shows us to what degree a percentage change in sales will cause a percentage change in:

A firm's financial risk is measured by its variability in EBIT over time.

Of the components shown below, which is least likely to be of value in calculating the cost of preferred stock?

All of the following statements regarding capital structure weights in the WACC equation are correct except:

EBIT/EPS analysis allows managers to see how different capital structures affect the earnings levels of their firms.

The firm's target capital structure is consistent with which of the following?

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:

Firm value is calculated by adding expected cash flow to the firm's cost of capital under each capital structure.

A decrease in contractual managers' salaries will result in:

79100.Ningbo Shipping has determined it can issue preferred stock at $115 per share par value.The stock will pay a $12 annual dividend.The cost of issuing and selling the stock is $3 per share.The cost of the preferred stock 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