Question 1

Retained earnings represent cost-free financing to the firm.

Accepted Answer

A) True 
 B)False  False

Question 2

If a firm pays out 20% 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)  19.0%. 
A)  6.4%. 
B)  10.2%. 
C)  16.3%. 
D)  19.0%. D

Question 3

The project's pre-tax minimum rate of return must equal which of the following:

Accepted Answer

A)  Lender's interest - Shareholders' return 
B)  Lender's interest + Shareholders' return 
C)  Minimum cash flow x Investment 
D)  Minimum cash flow ∕ Investment 
A)  Lender's interest - Shareholders' return 
B)  Lender's interest + Shareholders' return 
C)  Minimum cash flow x Investment 
D)  Minimum cash flow ∕ Investment D

Question 4

The greater the total fixed operating costs of a firm, the greater the degree of operating leverage and the greater the degree of combined leverage.

Accepted Answer

A) True 
 B)False

Question 5

ROA = Profit margin / Total asset turnover.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

The static trade-off hypothesis states that firms will balance the advantages of debt with its disadvantages.

Accepted Answer

A) True 
 B)False

Question 8

The degree of combined leverage is measured by adding the degree of operating leverage and degree of financial leverage.

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

The hypotheses that states that firm's try to time the market by issuing stocks when stock prices are high and repurchasing shares when prices are low is called:

Accepted Answer

A)  the market theory hypothesis 
B)  the market timing hypothesis 
C)  the market value hypothesis 
D)  the market pricing hypothesis 
A)  the market theory hypothesis 
B)  the market timing hypothesis 
C)  the market value hypothesis 
D)  the market pricing hypothesis

Question 11

When retained earnings are used up and new common stock is issued, we know that the cost of:

Accepted Answer

A)  equity has increased 
B)  equity has dropped 
C)  equity is unaffected 
D)  both common and preferred stock are affected 
A)  equity has increased 
B)  equity has dropped 
C)  equity is unaffected 
D)  both common and preferred stock are affected

Question 12

The dividend payout ratio is the proportion of each dollar of earnings that is paid to shareholders as a dividend; equals one minus the retention rate.

Accepted Answer

A) True 
 B)False

Question 13

The required return, the cost of capital, and the discount rate are actually three distinctively different concepts.

Accepted Answer

A) True 
 B)False

Question 14

An implication of the pecking order and market timing hypotheses is that the firm has no optimal capital structure.

Accepted Answer

A) True 
 B)False

Question 15

The weighted average cost of capital represents the maximum required rate of return on a capital-budgeting project and is found by multiplying the cost of each capital structure component by its appropriate weight and summing the terms.

Accepted Answer

A) True 
 B)False

Question 16

All classes of common equity may have the same dividends.

Accepted Answer

A) True 
 B)False

Question 17

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 18

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

Accepted Answer

A)  If the firm targets an "A" rating (or any other bond rating), a review of the yields to maturity on A-rated bonds in Standard & Poor's Bond Guide can provide an estimate of the firm's current borrowing costs. 
B)  The firm can solicit the advice of investment bankers on the cost of issuing new debt. 
C)  If the firm has debt currently trading, it can use public market prices and yields to estimate its current cost of debt. 
D)  A firm can seek long-term debt financing from a bank or a consortium of banks; preliminary discussions with the bankers will not indicate a ballpark interest rate the firm can expect to pay on its borrowing. 
A)  If the firm targets an "A" rating (or any other bond rating), a review of the yields to maturity on A-rated bonds in Standard & Poor's Bond Guide can provide an estimate of the firm's current borrowing costs. 
B)  The firm can solicit the advice of investment bankers on the cost of issuing new debt. 
C)  If the firm has debt currently trading, it can use public market prices and yields to estimate its current cost of debt. 
D)  A firm can seek long-term debt financing from a bank or a consortium of banks; preliminary discussions with the bankers will not indicate a ballpark interest rate the firm can expect to pay on its borrowing.

Question 19

Ningbo Shipping has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of Ningbo Shipping preferred stock is:

Accepted Answer

A)  7.2%. 
B)  12.0%. 
C)  12.4%. 
D)  15%. 
A)  7.2%. 
B)  12.0%. 
C)  12.4%. 
D)  15%.

Question 20

A nonoptimal capital structure may lead the firm to reject some capital budgeting projects that could have increased shareholder wealth with an optimal financing mix.

Accepted Answer

A) True 
 B)False

Retained earnings represent cost-free financing to the firm.

If a firm pays out 20% 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 project's pre-tax minimum rate of return must equal which of the following:

The greater the total fixed operating costs of a firm, the greater the degree of operating leverage and the greater the degree of combined leverage.

ROA = Profit margin / Total asset turnover.

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

The static trade-off hypothesis states that firms will balance the advantages of debt with its disadvantages.

The degree of combined leverage is measured by adding the degree of operating leverage and degree of financial leverage.

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

The hypotheses that states that firm's try to time the market by issuing stocks when stock prices are high and repurchasing shares when prices are low is called:

When retained earnings are used up and new common stock is issued, we know that the cost of:

The dividend payout ratio is the proportion of each dollar of earnings that is paid to shareholders as a dividend; equals one minus the retention rate.

The required return, the cost of capital, and the discount rate are actually three distinctively different concepts.

An implication of the pecking order and market timing hypotheses is that the firm has no optimal capital structure.

The weighted average cost of capital represents the maximum required rate of return on a capital-budgeting project and is found by multiplying the cost of each capital structure component by its appropriate weight and summing the terms.

All classes of common equity may have the same dividends.

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

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

Ningbo Shipping has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of Ningbo Shipping preferred stock is:

A nonoptimal capital structure may lead the firm to reject some capital budgeting projects that could have increased shareholder wealth with an optimal financing mix.

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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 Valuations

Securities and 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

Retained earnings represent cost-free financing to the firm.

If a firm pays out 20% 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 project's pre-tax minimum rate of return must equal which of the following:

The greater the total fixed operating costs of a firm, the greater the degree of operating leverage and the greater the degree of combined leverage.

ROA = Profit margin / Total asset turnover.

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

The static trade-off hypothesis states that firms will balance the advantages of debt with its disadvantages.

The degree of combined leverage is measured by adding the degree of operating leverage and degree of financial leverage.

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

The hypotheses that states that firm's try to time the market by issuing stocks when stock prices are high and repurchasing shares when prices are low is called:

When retained earnings are used up and new common stock is issued, we know that the cost of:

The dividend payout ratio is the proportion of each dollar of earnings that is paid to shareholders as a dividend; equals one minus the retention rate.

The required return, the cost of capital, and the discount rate are actually three distinctively different concepts.

An implication of the pecking order and market timing hypotheses is that the firm has no optimal capital structure.

The weighted average cost of capital represents the maximum required rate of return on a capital-budgeting project and is found by multiplying the cost of each capital structure component by its appropriate weight and summing the terms.

All classes of common equity may have the same dividends.

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

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

Ningbo Shipping has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of Ningbo Shipping preferred stock is:

A nonoptimal capital structure may lead the firm to reject some capital budgeting projects that could have increased shareholder wealth with an optimal financing 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 Valuations

Securities and 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