Question 1

Which of the following is a correct way to calculate degree of combined leverage?

Accepted Answer

A)  divide DFL by DOL 
B)  multiply DOL by DFL 
C)  divide DOL by DFL 
D)  add DOL and DFL 
A)  divide DFL by DOL 
B)  multiply DOL by DFL 
C)  divide DOL by DFL 
D)  add DOL and DFL

Question 2

All of the following are 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 three sources of common equity, retained earnings, treasury stock, 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. 
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 three sources of common equity, retained earnings, treasury stock, 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.

Question 3

This is the proportion of each dollar of earnings per share that is retained by the firm.

Accepted Answer

A)  Internal rate of return 
B)  Internal growth rate 
C)  Retention rate 
D)  Dividend payout ratio 
A)  Internal rate of return 
B)  Internal growth rate 
C)  Retention rate 
D)  Dividend payout ratio

Question 4

What is Ningbo Shipping's WACC if it's after tax cost of debt is 3.5%, it's cost of retained earnings is 14%, and the firm's market value of debt is $40 million while the market value of its equity is $60 million?

Accepted Answer

A)  9.8%. 
B)  3.5%. 
C)  11.8%. 
D)  14.7%. 
A)  9.8%. 
B)  3.5%. 
C)  11.8%. 
D)  14.7%.

Question 5

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%. 
A)  5%. 
B)  8%. 
C)  10%. 
D)  13%.

Question 6

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 
D)  an increase in operational 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 
D)  an increase in operational leverage

Question 7

The internal growth rate measures how quickly a firm can grow when it uses both internal equity and debt financing to keep its capital structure constant over time.

Accepted Answer

A) True 
 B)False

Question 8

Operating leverage affects the top portion of a firm's income statement whereas financial leverage affects the bottom half of the income statement.

Accepted Answer

A) True 
 B)False

Question 9

EBIT/eps analysis inadequately captures the risk facing investors and how it affects shareholder wealth.

Accepted Answer

A) True 
 B)False

Question 10

A nonoptimal capital structure may lead to higher financing costs.

Accepted Answer

A) True 
 B)False

Question 11

A firm's degree of combined leverage can be measured as degree of operating leverage __________ the degree of financial leverage:

Accepted Answer

A)  plus 
B)  minus 
C)  times 
D)  divided by 
A)  plus 
B)  minus 
C)  times 
D)  divided by

Question 12

To compensate the firm's investors adequately, the project should generate an annual pretax expected cash flow equal to 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

Question 13

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 is not the firm's capital structure. 
C)  A non-optimal 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. 
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 is not the firm's capital structure. 
C)  A non-optimal 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.

Question 14

This is a theory that states firms will balance the advantages of debt with its disadvantages.

Accepted Answer

A)  Rational decision maker hypothesis 
B)  Static trade-off hypothesis 
C)  Pecking order hypothesis 
D)  Market timing hypothesis 
A)  Rational decision maker hypothesis 
B)  Static trade-off hypothesis 
C)  Pecking order hypothesis 
D)  Market timing hypothesis

Question 15

What should be the relation between the target capital structure for a firm and the firm's optimum capital structure?

Accepted Answer

A)  Target and optimum capital structures should be the same. 
B)  Target capital structure is more conservative overall. 
C)  Target capital structure contains more debt. 
D)  Target capital structure excludes preferred stock. 
A)  Target and optimum capital structures should be the same. 
B)  Target capital structure is more conservative overall. 
C)  Target capital structure contains more debt. 
D)  Target capital structure excludes preferred stock.

Question 16

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 17

The degree of financial leverage measures the sensitivity of earnings per share to changes in EBIT.

Accepted Answer

A) True 
 B)False

Question 18

Some classes of common equity may have superior voting rights.

Accepted Answer

A) True 
 B)False

Question 19

If a firm has current earnings per share of $2 and a degree of operating 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 20

The minimum required rate of return is a weighted average of the firm's cost of various sources of capital.

Accepted Answer

A) True 
 B)False

Which of the following is a correct way to calculate degree of combined leverage?

All of the following are correct except:

This is the proportion of each dollar of earnings per share that is retained by the firm.

What is Ningbo Shipping's WACC if it's after tax cost of debt is 3.5%, it's cost of retained earnings is 14%, and the firm's market value of debt is $40 million while the market value of its equity is $60 million?

A decrease in contractual managers' salaries will result in:

The internal growth rate measures how quickly a firm can grow when it uses both internal equity and debt financing to keep its capital structure constant over time.

Operating leverage affects the top portion of a firm's income statement whereas financial leverage affects the bottom half of the income statement.

EBIT/eps analysis inadequately captures the risk facing investors and how it affects shareholder wealth.

A nonoptimal capital structure may lead to higher financing costs.

A firm's degree of combined leverage can be measured as degree of operating leverage __________ the degree of financial leverage:

To compensate the firm's investors adequately, the project should generate an annual pretax expected cash flow equal to which of the following:

All of the following statements are correct, except:

This is a theory that states firms will balance the advantages of debt with its disadvantages.

What should be the relation between the target capital structure for a firm and the firm's optimum capital structure?

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

The degree of financial leverage measures the sensitivity of earnings per share to changes in EBIT.

Some classes of common equity may have superior voting rights.

If a firm has current earnings per share of $2 and a degree of operating leverage of 4, a 10% increase in sales would result in earnings per share of:

The minimum required rate of return is a weighted average of the firm's cost of various sources of capital.

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

Exam 18: Capital Structure and the Cost of Capital

Which of the following is a correct way to calculate degree of combined leverage?

All of the following are correct except:

This is the proportion of each dollar of earnings per share that is retained by the firm.

What is Ningbo Shipping's WACC if it's after tax cost of debt is 3.5%, it's cost of retained earnings is 14%, and the firm's market value of debt is $40 million while the market value of its equity is $60 million?

A decrease in contractual managers' salaries will result in:

The internal growth rate measures how quickly a firm can grow when it uses both internal equity and debt financing to keep its capital structure constant over time.

Operating leverage affects the top portion of a firm's income statement whereas financial leverage affects the bottom half of the income statement.

EBIT/eps analysis inadequately captures the risk facing investors and how it affects shareholder wealth.

A nonoptimal capital structure may lead to higher financing costs.

A firm's degree of combined leverage can be measured as degree of operating leverage __________ the degree of financial leverage:

To compensate the firm's investors adequately, the project should generate an annual pretax expected cash flow equal to which of the following:

All of the following statements are correct, except:

This is a theory that states firms will balance the advantages of debt with its disadvantages.

What should be the relation between the target capital structure for a firm and the firm's optimum capital structure?

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

The degree of financial leverage measures the sensitivity of earnings per share to changes in EBIT.

Some classes of common equity may have superior voting rights.

If a firm has current earnings per share of $2 and a degree of operating leverage of 4, a 10% increase in sales would result in earnings per share of:

The minimum required rate of return is a weighted average of the firm's cost of various sources of capital.

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