Question 1

The weighted average cost of capital is used so project acceptance is not subject to how it is to be financed.

Accepted Answer

A) True 
 B)False

Question 2

The cost of retained earnings is:

Accepted Answer

A)  the cheapest component cost 
B)  zero because the firm does not have to pay interest or dividend to itself 
C)  always less than the cost of new common stock 
D)  typically cheaper than the cost of preferred stock 
A)  the cheapest component cost 
B)  zero because the firm does not have to pay interest or dividend to itself 
C)  always less than the cost of new common stock 
D)  typically cheaper than the cost of preferred stock

Question 3

The cost of capital should be estimated from the historical cost of raising debt and equity capital.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is a different concept from the other three?

Accepted Answer

A)  required rate of return 
B)  cost of capital 
C)  discount rate 
D)  net profit margin 
A)  required rate of return 
B)  cost of capital 
C)  discount rate 
D)  net profit margin

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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 7

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

Accepted Answer

A) True 
 B)False

Question 8

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)  an increase in the degree of financial leverage 
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)  an increase in the degree of financial leverage

Question 9

The cost of debt represents the minimum acceptable rate of return to a firm on a project of average risk.

Accepted Answer

A) True 
 B)False

Question 10

Leverage does not affect EPS for most firms.

Accepted Answer

A) True 
 B)False

Question 11

Financial risk affects the bottom half of the income statement.

Accepted Answer

A) True 
 B)False

Question 12

Variations in EBIT will produce changes in earnings per share.

Accepted Answer

A) True 
 B)False

Question 13

Firms have three sources of common equity, retained earnings, new stock issues, and new bond issues.

Accepted Answer

A) True 
 B)False

Question 14

All of the following statements are correct except:

Accepted Answer

A)  The tax deductibility of debt becomes more important to firms with large non-debt tax shields such as foreign tax credits granted by the U.S. government to firms that pay taxes to foreign governments. 
B)  As the debt/total asset ratio rises, or as earnings become more volatile, the firm will face higher borrowing costs, driven upward by bond investors requiring higher yields to compensate for additional risk. 
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. 
A)  The tax deductibility of debt becomes more important to firms with large non-debt tax shields such as foreign tax credits granted by the U.S. government to firms that pay taxes to foreign governments. 
B)  As the debt/total asset ratio rises, or as earnings become more volatile, the firm will face higher borrowing costs, driven upward by bond investors requiring higher yields to compensate for additional risk. 
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.

Question 15

All of the following components are needed to calculate the internal growth rate except:

Accepted Answer

A)  return on assets 
B)  retention rate 
C)  return on equity 
D)  earnings on assets 
A)  return on assets 
B)  retention rate 
C)  return on equity 
D)  earnings on assets

Question 16

Preferred stock has a claim on the firm that is senior to the bondholder claim and also senior to the common shareholder claim.

Accepted Answer

A) True 
 B)False

Question 17

A company with a DCL of 12 and a DFL of 2 has a DOL of?

Accepted Answer

A)  24 
B)  14 
C)  6 
D)  3 
A)  24 
B)  14 
C)  6 
D)  3

Question 18

The cost of capital for retained earnings:

Accepted Answer

A)  cannot be determined 
B)  may be determined by more than method 
C)  is greater than the cost of capital for common stock 
D)  is higher than the cost issuing bonds 
A)  cannot be determined 
B)  may be determined by more than method 
C)  is greater than the cost of capital for common stock 
D)  is higher than the cost issuing bonds

Question 19

Corporate bond yields are extremely stable over time.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements are correct?

Accepted Answer

A)  The tax deductibility of debt becomes more important to firms with large non-debt tax shields such as foreign tax credits granted by the U.S. government to firms that pay taxes to foreign governments. 
B)  As the debt/total asset ratio falls, or as earnings become less volatile, the firm will face lower borrowing costs, driven down by bond investors requiring lower yields to compensate for less risk. 
C)  The static tradeoff hypothesis states that firms will balance the advantages of equity (its lower cost and tax-deductibility of dividends) with its disadvantages (greater possibility of bankruptcy and the value of explicit and implicit bankruptcy costs). 
D)  Agency costs increase the optimal level of debt financing for a firm above the level that would be appropriate if agency costs were zero. 
A)  The tax deductibility of debt becomes more important to firms with large non-debt tax shields such as foreign tax credits granted by the U.S. government to firms that pay taxes to foreign governments. 
B)  As the debt/total asset ratio falls, or as earnings become less volatile, the firm will face lower borrowing costs, driven down by bond investors requiring lower yields to compensate for less risk. 
C)  The static tradeoff hypothesis states that firms will balance the advantages of equity (its lower cost and tax-deductibility of dividends) with its disadvantages (greater possibility of bankruptcy and the value of explicit and implicit bankruptcy costs). 
D)  Agency costs increase the optimal level of debt financing for a firm above the level that would be appropriate if agency costs were zero.

The weighted average cost of capital is used so project acceptance is not subject to how it is to be financed.

The cost of retained earnings is:

The cost of capital should be estimated from the historical cost of raising debt and equity capital.

Which of the following is a different concept from the other three?

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

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.

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

A decrease in contractual managers' salaries will result in:

The cost of debt represents the minimum acceptable rate of return to a firm on a project of average risk.

Leverage does not affect EPS for most firms.

Financial risk affects the bottom half of the income statement.

Variations in EBIT will produce changes in earnings per share.

Firms have three sources of common equity, retained earnings, new stock issues, and new bond issues.

All of the following statements are correct except:

All of the following components are needed to calculate the internal growth rate except:

Preferred stock has a claim on the firm that is senior to the bondholder claim and also senior to the common shareholder claim.

A company with a DCL of 12 and a DFL of 2 has a DOL of?

The cost of capital for retained earnings:

Corporate bond yields are extremely stable over time.

Which of the following statements are correct?

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

The weighted average cost of capital is used so project acceptance is not subject to how it is to be financed.

The cost of retained earnings is:

The cost of capital should be estimated from the historical cost of raising debt and equity capital.

Which of the following is a different concept from the other three?

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

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.

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

A decrease in contractual managers' salaries will result in:

The cost of debt represents the minimum acceptable rate of return to a firm on a project of average risk.

Leverage does not affect EPS for most firms.

Financial risk affects the bottom half of the income statement.

Variations in EBIT will produce changes in earnings per share.

Firms have three sources of common equity, retained earnings, new stock issues, and new bond issues.

All of the following statements are correct except:

All of the following components are needed to calculate the internal growth rate except:

Preferred stock has a claim on the firm that is senior to the bondholder claim and also senior to the common shareholder claim.

A company with a DCL of 12 and a DFL of 2 has a DOL of?

The cost of capital for retained earnings:

Corporate bond yields are extremely stable over time.

Which of the following statements are correct?

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