Question 1

All of the following methods are correct except:

Accepted Answer

A)  Like debt and preferred stock, cash flows from common equity are fixed. 
B)  Firms have two sources of common equity, retained earnings 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)  Like debt and preferred stock, cash flows from common equity are fixed. 
B)  Firms have two sources of common equity, retained earnings 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 2

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 3

If a firm pays out 30% of its earnings as dividends and has averaged a 20 percent return on assets, how quickly can the firm grow without needing to secure outside funding sources?

Accepted Answer

A)  6.4%. 
B)  10.2%. 
C)  16.3%. 
D)  20.0%. 
A)  6.4%. 
B)  10.2%. 
C)  16.3%. 
D)  20.0%.

Question 4

The minimum acceptable rate of return for a project is the return that generates sufficient cash flow to pay investors their expected return.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is correct?

Accepted Answer

A)  The degree of combined leverage measures the sensitivity of earnings per share into 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)  Total leverage does not consider financial leverage. 
A)  The degree of combined leverage measures the sensitivity of earnings per share into 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)  Total leverage does not consider financial leverage.

Question 6

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 7

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. 
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.

Question 8

There is no opportunity cost associated with retained earnings.

Accepted Answer

A) True 
 B)False

Question 9

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%. 
A)  6.4%. 
B)  9.4%. 
C)  10.7%. 
D)  14.7%.

Question 10

The basic capital structure of a firm may include debt, preferred equity, common equity, and bonds.

Accepted Answer

A) True 
 B)False

Question 11

This is a measure of how quickly a firm can increase its asset base over the next year without raising outside funds,

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 12

As a general rule, the capital structure that:

Accepted Answer

A)  minimizes the cost of equity also maximizes the stock price 
B)  maximizes the stock price also minimizes the weighted average cost of capital 
C)  minimizes the cost of debt also maximizes the expected earnings per share 
D)  increases operating leverage for a given quantity of output, increases business risk 
A)  minimizes the cost of equity also maximizes the stock price 
B)  maximizes the stock price also minimizes the weighted average cost of capital 
C)  minimizes the cost of debt also maximizes the expected earnings per share 
D)  increases operating leverage for a given quantity of output, increases business risk

Question 13

The internal and sustainable growth rate relationships suggest that there are three measurable influences on growth. These include all of the following except:

Accepted Answer

A)  asset policy 
B)  dividend policy 
C)  profitability 
D)  the firm's capital structure 
A)  asset policy 
B)  dividend policy 
C)  profitability 
D)  the firm's capital structure

Question 14

This is a theory that managers prefer to use additions to retained earnings to finance the firm, then debt, and as a final resort, new equity.

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

The degree of combined leverage is the percentage change in earnings per share that results from a one percent change in EBIT.

Accepted Answer

A) True 
 B)False

All of the following methods are correct except:

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

If a firm pays out 30% of its earnings as dividends and has averaged a 20 percent return on assets, how quickly can the firm grow without needing to secure outside funding sources?

The minimum acceptable rate of return for a project is the return that generates sufficient cash flow to pay investors their expected return.

Which of the following statements is correct?

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

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

There is no opportunity cost associated with retained earnings.

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 basic capital structure of a firm may include debt, preferred equity, common equity, and bonds.

This is a measure of how quickly a firm can increase its asset base over the next year without raising outside funds,

As a general rule, the capital structure that:

The internal and sustainable growth rate relationships suggest that there are three measurable influences on growth. These include all of the following except:

This is a theory that managers prefer to use additions to retained earnings to finance the firm, then debt, and as a final resort, new equity.

The degree of combined leverage is the percentage change in earnings per share that results from a one percent change in EBIT.

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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

All of the following methods are correct except:

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

If a firm pays out 30% of its earnings as dividends and has averaged a 20 percent return on assets, how quickly can the firm grow without needing to secure outside funding sources?

The minimum acceptable rate of return for a project is the return that generates sufficient cash flow to pay investors their expected return.

Which of the following statements is correct?

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

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

There is no opportunity cost associated with retained earnings.

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 basic capital structure of a firm may include debt, preferred equity, common equity, and bonds.

This is a measure of how quickly a firm can increase its asset base over the next year without raising outside funds,

As a general rule, the capital structure that:

The internal and sustainable growth rate relationships suggest that there are three measurable influences on growth. These include all of the following except:

This is a theory that managers prefer to use additions to retained earnings to finance the firm, then debt, and as a final resort, new equity.

The degree of combined leverage is the percentage change in earnings per share that results from a one percent change in EBIT.

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