Answer Options:
a. True
b. False
Answer: a. True
Question: EBITDA stands for earnings before interest, taxes, debt, and assets.
Answer Options:
a. True
b. False
Answer: b. False
Question: If one of your firm’s customers is “stretching” its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.
Answer Options:
a. True
b. False
Answer: b. False
Question: An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected.
Answer Options:
a. True
b. False
Answer: b. False
Question: The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate.
Answer Options:
a. True
b. False
Answer: a. True
Question: Long-term loan agreements always contain provisions, or covenants, that constrain the firm’s future actions. Short-term credit agreements are just as restrictive in order to protect the interest of the lender.
Answer Options:
a. True
b. False
Answer: b. False
Question: Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm’s taxes.
Answer Options:
a. True
b. False
Answer: b. False
Question: If a firm’s marginal tax rate is increased, this would, other things held constant, lower the cost of debt used to calculate its WACC.
Answer Options:
a. True
b. False
Answer: a. True
Question: If a profitable firm finds that it simply must “stretch” its accounts payable, then this suggests that it is undercapitalized, i.e., that it needs more working capital to support its operations.
Answer Options:
a. True
b. False
Answer: a. True
Question: The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends received by a corporation may be excluded from the receiving corporation’s taxable income.
Answer Options:
a. True
b. False
Answer: b. False
Question: The cost of equity raised by retaining earnings can be less than, equal to, or greater than the cost of external equity raised by selling new issues of common stock, depending on tax rates, flotation costs, the attitude of investors, and other factors.
Answer Options:
a. True
b. False
Answer: a. True
Question: The SML relates required returns to firms’ systematic (or market) risk. The slope and intercept of this line can be influenced by a manager’s actions.
Answer Options:
a. True
b. False
Answer: b. False
Question: Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e., after the fact) sense even though it is possible to match maturities on an ex ante (expected) basis.
Answer Options:
a. True
b. False
Answer: a. True
Question: A firm’s peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality payments are concentrated at the beginning of each month.
Answer Options:
a. True
b. False
Answer: a. True
Question: If a firm switched from taking trade credit discounts to paying on the net due date, this might cost the firm some money, but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.
Answer Options:
a. True
b. False
Answer: b. False