Answer Options:
a. True
b. False
Answer: a. True
Question: Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them, and no flotation costs are required to raise them, but capital raised by selling new stock or bonds does have a cost.
Answer Options:
a. True
b. False
Answer: b. False
Question: “Stretching” accounts payable is a widely accepted, entirely ethical, and costless financing technique, which is particularly useful when suppliers’ production plants are at full capacity.
Answer Options:
a. True
b. False
Answer: b. False
Question: Free cash flow is the amount of cash that if withdrawn would harm the firm’s ability to operate and to produce future cash flows.
Answer Options:
a. True
b. False
Answer: b. False
Question: Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.
Answer Options:
a. True
b. False
Answer: b. False
Question: In general, firms should use their weighted average cost of capital (WACC) to evaluate capital budgeting projects because most projects are funded with general corporate funds, which come from a variety of sources. However, if the firm plans to use only debt or only equity to fund a particular project, it should use the after-tax cost of that specific type of capital to evaluate that project.
Answer Options:
a. True
b. False
Answer: b. False
Question: Any change in its beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock’s price, other things held constant.
Answer Options:
a. True
b. False
Answer: a. True
Question: For capital budgeting and cost of capital purposes, the firm should always consider retained earnings as the first source of capital (i.e., use these funds first) because retained earnings have no cost to the firm.
Answer Options:
a. True
b. False
Answer: b. False
Question: Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.
Answer Options:
a. True
b. False
Answer: a. True
Question: The reason why retained earnings have a cost equal to rs is because investors think they can (i.e., expect to) earn rs on investments with the same risk as the firm’s common stock, and if the firm does not think that it can earn rs on the earnings that it retains, it should pay those earnings out to its investors. Thus, the cost of retained earnings is based on the opportunity cost principle.
Answer Options:
a. True
b. False
Answer: a. True
Question: Firms raise capital at the total corporate level by retaining earnings and by obtaining funds in the capital markets. They then provide funds to their different divisions for investment in capital projects. The divisions may vary in risk, and the projects within the divisions may also vary in risk. Therefore, it is conceptually correct to use different risk-adjusted costs of capital for different capital budgeting projects.
Answer Options:
a. True
b. False
Answer: a. True
Question: The amount shown on the December 31, 2015, balance sheet as “retained earnings” is equal to the firm’s net income for 2015 minus any dividends it paid.
Answer Options:
a. True
b. False
Answer: b. False
Question: The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance.
Answer Options:
a. True
b. False
Answer: a. True
Question: If a firm sells on terms of 2/10, net 30 days, and its DSO is 28 days, then the fact that the 28-day DSO is less than the 30-day credit period tell us that the credit department is functioning efficiently and there are no past due accounts.
Answer Options:
a. True
b. False
Answer: b. False
Question: The first major section of a typical statement of cash flows is “Operating Activities,” and the first entry in this section is “Net Income.” Then, also in the first section, we show some items that represent increases or decreases to cash, and the last entry is called “Net Cash Provided by Operating Activities.” This number can be either positive or negative, but if it is negative, the firm is almost certain to soon go bankrupt.
Answer Options:
a. True
b. False
Answer: b. False
Question: Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors.
Answer Options:
a. True
b. False
Answer: b. False
Question: With a “self-liquidating,” approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates. When short-term rates are relatively high, short-term assets will be financed with long-term debt to reduce costs.
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 cost of common equity obtained by retaining earnings is the rate of return the marginal stockholder requires on the firm’s common stock.
Answer Options:
a. True
b. False
Answer: a. True