Question 1

Business risk is concerned with the operations of the firm.Which of the following is not associated with (or not a part of)business risk?

Accepted Answer

A)  Demand variability. 
B)  Sales price variability. 
C)  The extent to which operating costs are fixed. 
D)  Changes in required returns due to financing decisions. 
E)  The ability to change prices as costs change.

Question 2

Which of the following is not a factor that influences capital structure decisions for firms?

Accepted Answer

A)  financial flexibility 
B)  rational investors 
C)  business risk 
D)  tax position

Question 3

Once the target capital structure for a firm is decided,managerial decisions can result in the actual capital structure differing from the target structure,but operating conditions will have a negligible effect on actual capital structure.

Accepted Answer

A) True 
 B)False

Question 4

The following facts apply to your company:  Based on the residual dividend policy,the payout ratio is 60 percent.How large (in millions of dollars)will the capital budget be?

Accepted Answer

A)  $43.2 
B)  $50.0 
C)  $64.8 
D)  $86.4 
E)  $108.0

Question 5

Your company has decided that its capital budget during the coming year will be $20 million.Its optimal capital structure is 60 percent equity and 40 percent debt.Its earnings before interest and taxes (EBIT)are projected to be $34.667 million for the year.The company has $200 million of assets;its average interest rate on outstanding debt is 10 percent;and its tax rate is 40 percent.If the company follows the residual dividend policy and maintains the same capital structure,what will its dividend payout ratio be?

Accepted Answer

A)  15% 
B)  20% 
C)  25% 
D)  30% 
E)  35%

Question 6

The ability of a firm to raise sufficient capital on competitive terms under adverse conditions in order to sustain steady operations is referred to as financial flexibility.

Accepted Answer

A) True 
 B)False

Question 7

Modigliani and Miller's dividend irrelevance theory says that dividend policy does not affect a firm's value but can affect its cost of capital.

Accepted Answer

A) True 
 B)False

Question 8

One implication of information asymmetry between investors and firm managers is that if a firm raises new capital by issuing debt rather than by selling stock,it signals that the firm has very good prospects.

Accepted Answer

A) True 
 B)False

Question 9

The "Pure Modigliani and Miller Result" establishes,under restrictive assumptions,that the firm's stock price will be maximized if it uses virtually 100 percent debt.Which of the following real world conditions does the most to limit real world corporate debt-to-assets ratios to far less than 100 percent?

Accepted Answer

A)  There are brokerage costs. 
B)  At high levels of debt revenues decline. 
C)  Investors can't really borrow at the same rate as corporations. 
D)  Interest rates increase as the debt-to-assets ratio rises. 
E)  Dividends are relevant in the real world.

Question 10

As the percentage of debt in a firm's capital structure increases,its financial risk increases.Once the firm increases its debt beyond the optimal level,rising interest charges result in an immediate decrease in EPS.

Accepted Answer

A) True 
 B)False

Question 11

When a firm conducts a seasoned equity offering and uses the proceeds to purchase a portion of the firm's outstanding debt,then the firm's

Accepted Answer

A)  financial risk increases. 
B)  financial risk decreases. 
C)  business risk increases. 
D)  business risk decreases.

Question 12

____ information is the situation in which managers have better information about the firm's prospects.

Accepted Answer

A)  Asymmetric 
B)  Symmetric 
C)  Perfect 
D)  Public

Question 13

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Accepted Answer

A) True 
 B)False

Question 14

A consistent supply of capital is essential for the long-run success of a firm.Although a firm may have access to capital under all types of economic conditions,the concept of financial flexibility implies that the firm can obtain capital on acceptable,competitive terms.

Accepted Answer

A) True 
 B)False

Question 15

A firm that follows a residual dividend policy must believe that the dividend irrelevance theory is correct.

Accepted Answer

A) True 
 B)False

Question 16

Generally,the more stable a firm's operations,the more debt it can handle in its capital structure.

Accepted Answer

A) True 
 B)False

Question 17

The optimal capital structure is that which results in the highest earnings per share because that will ensure maximum stock price.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is correct?

Accepted Answer

A)  There have been no significant observed differences in the capital structures of U.S.corporations in comparison to their German and Japanese counterparts. 
B)  Different countries use essentially the same international accounting conventions with respect to reporting assets on a historical versus replacement cost basis. 
C)  An analysis of both bankruptcy and equity reporting costs leads to the conclusion that U.S.firms should have more equity and less debt than firms in Japan and Germany. 
D)  Equity monitoring costs are higher in the United States than in Japan and Germany. 
E)  Debt monitoring costs are probably lower in the United States than in Japan and Germany.

Question 19

Business risk depends on all of the following factors except ____.

Accepted Answer

A)  sales variability 
B)  interest rates 
C)  input price variability 
D)  change in output prices

Question 20

Calculate the current price per share (P0)for Olson Corporation,given the following information.The data all pertain to the year just ended.

Accepted Answer

A)  $39.20 
B)  $57.84 
C)  $29.43 
D)  $61.90 
E)  None of the above.

Exam 14: Capital Structure and Dividend Policy Decisions

Business risk is concerned with the operations of the firm.Which of the following is not associated with (or not a part of) business risk?

Which of the following is not a factor that influences capital structure decisions for firms?

Once the target capital structure for a firm is decided,managerial decisions can result in the actual capital structure differing from the target structure,but operating conditions will have a negligible effect on actual capital structure.

The following facts apply to your company: Based on the residual dividend policy,the payout ratio is 60 percent.How large (in millions of dollars) will the capital budget be?

The ability of a firm to raise sufficient capital on competitive terms under adverse conditions in order to sustain steady operations is referred to as financial flexibility.

Modigliani and Miller's dividend irrelevance theory says that dividend policy does not affect a firm's value but can affect its cost of capital.

One implication of information asymmetry between investors and firm managers is that if a firm raises new capital by issuing debt rather than by selling stock,it signals that the firm has very good prospects.

As the percentage of debt in a firm's capital structure increases,its financial risk increases.Once the firm increases its debt beyond the optimal level,rising interest charges result in an immediate decrease in EPS.

When a firm conducts a seasoned equity offering and uses the proceeds to purchase a portion of the firm's outstanding debt,then the firm's

____ information is the situation in which managers have better information about the firm's prospects.

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

A consistent supply of capital is essential for the long-run success of a firm.Although a firm may have access to capital under all types of economic conditions,the concept of financial flexibility implies that the firm can obtain capital on acceptable,competitive terms.

A firm that follows a residual dividend policy must believe that the dividend irrelevance theory is correct.

Generally,the more stable a firm's operations,the more debt it can handle in its capital structure.

The optimal capital structure is that which results in the highest earnings per share because that will ensure maximum stock price.

Which of the following statements is correct?

Business risk depends on all of the following factors except ____.

Calculate the current price per share (P₀) for Olson Corporation,given the following information.The data all pertain to the year just ended.

Exam 14: Capital Structure and Dividend Policy Decisions

Business risk is concerned with the operations of the firm.Which of the following is not associated with (or not a part of) business risk?

Which of the following is not a factor that influences capital structure decisions for firms?

Once the target capital structure for a firm is decided,managerial decisions can result in the actual capital structure differing from the target structure,but operating conditions will have a negligible effect on actual capital structure.

The following facts apply to your company: Based on the residual dividend policy,the payout ratio is 60 percent.How large (in millions of dollars) will the capital budget be?

The ability of a firm to raise sufficient capital on competitive terms under adverse conditions in order to sustain steady operations is referred to as financial flexibility.

Modigliani and Miller's dividend irrelevance theory says that dividend policy does not affect a firm's value but can affect its cost of capital.

One implication of information asymmetry between investors and firm managers is that if a firm raises new capital by issuing debt rather than by selling stock,it signals that the firm has very good prospects.

As the percentage of debt in a firm's capital structure increases,its financial risk increases.Once the firm increases its debt beyond the optimal level,rising interest charges result in an immediate decrease in EPS.

When a firm conducts a seasoned equity offering and uses the proceeds to purchase a portion of the firm's outstanding debt,then the firm's

____ information is the situation in which managers have better information about the firm's prospects.

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

A consistent supply of capital is essential for the long-run success of a firm.Although a firm may have access to capital under all types of economic conditions,the concept of financial flexibility implies that the firm can obtain capital on acceptable,competitive terms.

A firm that follows a residual dividend policy must believe that the dividend irrelevance theory is correct.

Generally,the more stable a firm's operations,the more debt it can handle in its capital structure.

The optimal capital structure is that which results in the highest earnings per share because that will ensure maximum stock price.

Which of the following statements is correct?

Business risk depends on all of the following factors except ____.

Calculate the current price per share (P0) for Olson Corporation,given the following information.The data all pertain to the year just ended.

Calculate the current price per share (P₀) for Olson Corporation,given the following information.The data all pertain to the year just ended.