Question 1

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 2

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 3

Leverage does not affect EPS for most firms.

Accepted Answer

A) True 
 B)False

Question 4

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) 14.3%. 
D) 20.0%. 
E) none of the above. 
A) 6.4%. 
B) 10.2%. 
C) 14.3%. 
D) 20.0%. 
E) none of the above.

Question 5

Which of the following statements is most correct?

Accepted Answer

A) All component costs in a firm's weighted average cost of capital must reflect after-tax costs,but the only component that requires an adjustment for taxes is the cost of new common stock. 
B) An increase in the corporate tax rate would lower the weighted average cost of capital for the firm,other things held constant. 
C) The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt. 
D) All the above statements are equally true. 
A) All component costs in a firm's weighted average cost of capital must reflect after-tax costs,but the only component that requires an adjustment for taxes is the cost of new common stock. 
B) An increase in the corporate tax rate would lower the weighted average cost of capital for the firm,other things held constant. 
C) The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt. 
D) All the above statements are equally true.

Question 6

EBIT/EPS analysis allows managers to see how different capital structures affect the earnings levels of their firms.

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 firm's most recent financing mix. 
B) These target weights represent a mix of debt and equity that the firm will try to achieve or maintain for a period of at least 5 years. 
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 current liabilities,debt and equity. 
E) All of the above statements are correct. 
A) The weights represent a firm's most recent financing mix. 
B) These target weights represent a mix of debt and equity that the firm will try to achieve or maintain for a period of at least 5 years. 
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 current liabilities,debt and equity. 
E) All of the above statements are correct.

Question 8

All of the following statements are correct except:

Accepted Answer

A) The tax deductibility of debt becomes less important to firms with large nondebt 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 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. 
E) All of the above statements are correct. 
A) The tax deductibility of debt becomes less important to firms with large nondebt 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 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. 
E) All of the above statements are correct.

Question 9

One advantage of preferred is that it increases a firm's equity without diluting the ownership and control of the common shareholders.

Accepted Answer

A) True 
 B)False

Question 10

All of the following statements are correct except:

Accepted Answer

A) The internal growth rate measures how quickly a firm can increase its asset base over the next year using outside funds. 
B) The retention rate represents the proportion of every $1 of earnings per share that is retained by the firm;in other words,it is equal to one plus the dividend payout ratio. 
C) The sustainable growth rate measures how quickly the firm can grow when it uses only debt financing to keep its capital structure constant over time. 
D) The internal and sustainable growth rate relationships suggest that there are three measurable influences on growth: working capital policy,total asset turnover,and the firm's borrowing rate. 
E) None of the above statements are correct. 
A) The internal growth rate measures how quickly a firm can increase its asset base over the next year using outside funds. 
B) The retention rate represents the proportion of every $1 of earnings per share that is retained by the firm;in other words,it is equal to one plus the dividend payout ratio. 
C) The sustainable growth rate measures how quickly the firm can grow when it uses only debt financing to keep its capital structure constant over time. 
D) The internal and sustainable growth rate relationships suggest that there are three measurable influences on growth: working capital policy,total asset turnover,and the firm's borrowing rate. 
E) None of the above statements are correct.

Question 11

A firm's business risk is measured by the variability in which one of the following over time:

Accepted Answer

A) net sales 
B) total assets 
C) operating income (EBIT) 
D) net income 
A) net sales 
B) total assets 
C) operating income (EBIT) 
D) net income

Question 12

Which of the following securities have voting rights?

Accepted Answer

A) convertible bond 
B) preferred stock 
C) common stock 
D) all the above 
A) convertible bond 
B) preferred stock 
C) common stock 
D) all the above

Question 13

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%. 
E) none of the above. 
A) 6.4%. 
B) 9.4%. 
C) 10.7%. 
D) 14.7%. 
E) none of the above.

Question 14

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) all are needed 
A) return on assets 
B) retention rate 
C) return on equity 
D) all are needed

Question 15

Some classes of common equity may have superior voting rights.

Accepted Answer

A) True 
 B)False

Question 16

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 17

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 18

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 19

Which of the following costs must be adjusted to an after-tax cost?

Accepted Answer

A) cost of debt 
B) cost of preferred stock 
C) cost of common stock 
D) cost of retained earnings 
A) cost of debt 
B) cost of preferred stock 
C) cost of common stock 
D) cost of retained earnings

Question 20

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

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.

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

Leverage does not affect EPS for most firms.

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?

Which of the following statements is most correct?

EBIT/EPS analysis allows managers to see how different capital structures affect the earnings levels of their firms.

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

All of the following statements are correct except:

One advantage of preferred is that it increases a firm's equity without diluting the ownership and control of the common shareholders.

All of the following statements are correct except:

A firm's business risk is measured by the variability in which one of the following over time:

Which of the following securities have voting rights?

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

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

Some classes of common equity may have superior voting rights.

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

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

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:

Which of the following costs must be adjusted to an after-tax cost?

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

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 Valuation

Securities 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 firm's optimum debt/equity mix maximizes the firm's cost of capital,which in turn will help the firm to maximize shareholder wealth.

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

Leverage does not affect EPS for most firms.

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?

Which of the following statements is most correct?

EBIT/EPS analysis allows managers to see how different capital structures affect the earnings levels of their firms.

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

All of the following statements are correct except:

One advantage of preferred is that it increases a firm's equity without diluting the ownership and control of the common shareholders.

All of the following statements are correct except:

A firm's business risk is measured by the variability in which one of the following over time:

Which of the following securities have voting rights?

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

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

Some classes of common equity may have superior voting rights.

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

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

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:

Which of the following costs must be adjusted to an after-tax cost?

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

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 Valuation

Securities 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