Question 1

A decrease in a firm's willingness to pay dividends might result from an increase in its

Accepted Answer

A)  Earnings stability. 
B)  Access to capital markets. 
C)  Profitable investment opportunities. 
D)  Collection of accounts receivable. 
E)  Stock price. 
A)  Earnings stability. 
B)  Access to capital markets. 
C)  Profitable investment opportunities. 
D)  Collection of accounts receivable. 
E)  Stock price.

Question 2

Empirical testing has confirmed the validity of which of the following attitudes concerning dividends?

Accepted Answer

A)  Dividend irrelevance, or Modigliani-Miller, theory. 
B)  Investors prefer dividends to capital gains because dividends are more certain. 
C)  Investors prefer capital gains to dividends because capital gains are taxed at more favorable rates. 
D)  Empirical testing has produced some evidence in support of each of the theories above. 
E)  Empirical testing has not produced any definitive results. 
A)  Dividend irrelevance, or Modigliani-Miller, theory. 
B)  Investors prefer dividends to capital gains because dividends are more certain. 
C)  Investors prefer capital gains to dividends because capital gains are taxed at more favorable rates. 
D)  Empirical testing has produced some evidence in support of each of the theories above. 
E)  Empirical testing has not produced any definitive results.

Question 3

Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS.Thus, the two firms must have the same business risk.

Accepted Answer

A) True 
 B)False

Question 4

If debt financing is used, which of the following is correct?

Accepted Answer

A)  The percentage change in net operating income is greater than a given percentage change in net income. 
B)  The percentage change in net operating income is equal to a given percentage change in net income. 
C)  The percentage change in net operating income depends on the interest rate charged on debt. 
D)  The percentage change in net operating income is less than the percentage change in net income. 
E)  The degree of operating leverage is greater than 1. 
A)  The percentage change in net operating income is greater than a given percentage change in net income. 
B)  The percentage change in net operating income is equal to a given percentage change in net income. 
C)  The percentage change in net operating income depends on the interest rate charged on debt. 
D)  The percentage change in net operating income is less than the percentage change in net income. 
E)  The degree of operating leverage is greater than 1.

Question 5

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 6

Which of the following factors do not have an impact on the business risk of a firm?

Accepted Answer

A)  Sales variability 
B)  Input price variability 
C)  Price elasticity 
D)  Operating leverage 
E)  All of the above impact a firm's business risk 
A)  Sales variability 
B)  Input price variability 
C)  Price elasticity 
D)  Operating leverage 
E)  All of the above impact a firm's business risk

Question 7

Generally, as debt is substituted for equity, risk, as measured by the coefficient of variation of EPS, increases.This negative effect works against the positive effect of substituting debt for equity, which is that higher leverage increases expected EPS.

Accepted Answer

A) True 
 B)False

Question 8

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 9

Business risk is the single most important determinant of a firm's capital structure.

Accepted Answer

A) True 
 B)False

Question 10

Van Slyke Inc.has $5,000,000 in assets, and currently has no debt⎯it is financed entirely with 200,000 shares of common stock, each of which trades at $25 per share.The firm's EBIT is expected to be $1,250,000 at year end .The corporate tax rate is 40 percent.Van Slyke expects to pay out a dividend at year end which is 50 percent of its net income.The company estimates that its earnings and dividends grow at a constant rate of 3 percent a year.The company is considering a recapitalization where they would issue $1,000,000 of debt at a before-tax cost of 10 percent.The proceeds from the debt issued would be used to repurchase shares of the company's stock at $25 per share.The company's investment bankers estimate that the cost of equity capital would be 16 percent after the recapitalization.What would you expect the company's stock price to be immediately following the recapitalization? Assume that the dividend has not yet been paid.

Accepted Answer

A)  $12.15 
B)  $16.59 
C)  $20.98 
D)  $27.25 
E)  $33.17 
A)  $12.15 
B)  $16.59 
C)  $20.98 
D)  $27.25 
E)  $33.17

Question 11

The optimal capital structure is that which results in the highest earnings per share because that will ensure maximum stock price.

Accepted Answer

A) True 
 B)False

Question 12

The level of sales at which expected EPS will be the same regardless of whether the firm uses debt or common stock financing is called the EPS indifference point.

Accepted Answer

A) True 
 B)False

Question 13

In a world with no taxes, MM show that the capital structure of a firm does not affect the value of the firm.However, when taxes are considered, MM show a positive relationship between debt and firm value.

Accepted Answer

A) True 
 B)False

Question 14

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.

Question 15

The degree of financial risk is the single most important determinant of a firm's capital structure.

Accepted Answer

A) True 
 B)False

Question 16

If the firm's actual debt-to-assets ratio is below its target level, expansion capital should be raised by issuing equity in order to preserve the firm's borrowing capacity.

Accepted Answer

A) True 
 B)False

Question 17

Given the information below, calculate the expected growth rate (g) of dividends, using the constant growth model   Beta = 1.75; rRF = 7 percent; rM = 11 percent; dividend payout ratio = 30 percent; rd = 10 percent (paid) on all long-term debt; P/E ratio = 10; sales = 5,000 units; sales price per unit = $5; variable cost per unit = $2; fixed cost = $1,000; common stock shares outstanding = 5,000; long-term debt outstanding = $10,000; tax rate = 40 percent.Assume equilibrium exists in the market.

Accepted Answer

A)  11.34% 
B)  6.54% 
C)  11.0% 
D)  10.68% 
E)  10.19% 
A)  11.34% 
B)  6.54% 
C)  11.0% 
D)  10.68% 
E)  10.19%

Question 18

According to MM, in a world without taxes, the optimal capital structure for a firm should approach 100 percent debt financing.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is not a factor that influences capital structure decisions for firms?

Accepted Answer

A)  financial flexibility 
B)  rational investors 
C)  business risk 
D)  tax position 
A)  financial flexibility 
B)  rational investors 
C)  business risk 
D)  tax position

Question 20

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

Accepted Answer

A) True 
 B)False

A decrease in a firm's willingness to pay dividends might result from an increase in its

Empirical testing has confirmed the validity of which of the following attitudes concerning dividends?

Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS.Thus, the two firms must have the same business risk.

If debt financing is used, which of the following is correct?

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?

Which of the following factors do not have an impact on the business risk of a firm?

Generally, as debt is substituted for equity, risk, as measured by the coefficient of variation of EPS, increases.This negative effect works against the positive effect of substituting debt for equity, which is that higher leverage increases expected EPS.

Business risk is the single most important determinant of a firm's capital structure.

The optimal capital structure is that which results in the highest earnings per share because that will ensure maximum stock price.

The level of sales at which expected EPS will be the same regardless of whether the firm uses debt or common stock financing is called the EPS indifference point.

In a world with no taxes, MM show that the capital structure of a firm does not affect the value of the firm.However, when taxes are considered, MM show a positive relationship between debt and firm value.

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

The degree of financial risk is the single most important determinant of a firm's capital structure.

If the firm's actual debt-to-assets ratio is below its target level, expansion capital should be raised by issuing equity in order to preserve the firm's borrowing capacity.

According to MM, in a world without taxes, the optimal capital structure for a firm should approach 100 percent debt financing.

Which of the following is not a factor that influences capital structure decisions for firms?

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

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 Concepts

Security Valuation and Selection

Filters

Exam 14: Capital Structure and Dividend Policy Decisions

A decrease in a firm's willingness to pay dividends might result from an increase in its

Empirical testing has confirmed the validity of which of the following attitudes concerning dividends?

Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS.Thus, the two firms must have the same business risk.

If debt financing is used, which of the following is correct?

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?

Which of the following factors do not have an impact on the business risk of a firm?

Generally, as debt is substituted for equity, risk, as measured by the coefficient of variation of EPS, increases.This negative effect works against the positive effect of substituting debt for equity, which is that higher leverage increases expected EPS.

Business risk is the single most important determinant of a firm's capital structure.

The optimal capital structure is that which results in the highest earnings per share because that will ensure maximum stock price.

The level of sales at which expected EPS will be the same regardless of whether the firm uses debt or common stock financing is called the EPS indifference point.

In a world with no taxes, MM show that the capital structure of a firm does not affect the value of the firm.However, when taxes are considered, MM show a positive relationship between debt and firm value.

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

The degree of financial risk is the single most important determinant of a firm's capital structure.

If the firm's actual debt-to-assets ratio is below its target level, expansion capital should be raised by issuing equity in order to preserve the firm's borrowing capacity.

According to MM, in a world without taxes, the optimal capital structure for a firm should approach 100 percent debt financing.

Which of the following is not a factor that influences capital structure decisions for firms?

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

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 Concepts

Security Valuation and Selection

Filters