Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: Which of the following statements is CORRECT?
Answer Options:
a. When a company increases its debt ratio, the costs of equity and debt both increase. Therefore, the WACC must also increase.
b. The capital structure that maximizes the stock price is generally the capital structure that also maximizes the equity from retained earnings (rs).
Correct Answer: a
Answer:
Question: In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies, measured as if they were operated independently.
Answer Options:
a. True
b. False
Correct Answer: b
Answer:
Question: The Miller model begins with the Modigliani and Miller (MM) model with corporate taxes and then adds personal taxes.
Answer Options:
a. True
b. False
Answer: a. True
Question: Firms U and L each have the same amount of assets, investor-supplied capital, and both have a return on investors’ capital (ROIC) of 12%. Firm U is unleveraged, i.e., it is 100% equity financed, while Firm L is financed with 50% debt and 50% equity. Firm L’s debt has an after-tax cost of 8%. Both firms have positive net income and a 35% tax rate. Which of the following statements is CORRECT?
Answer Options:
a. The two companies have the same times interest earned (TIE) ratio.
b. Firm L has a lower ROA than Firm U.
c. Firm L has a lower ROE than Firm U.
d. Firm L has the higher times interest earned (TIE) ratio.
e. Firm L has a higher EBIT than Firm U.
Correct Answer: b
Answer:
Question: A sale and leaseback arrangement is a type of financial, or capital, lease.
Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: The primary reason given by managers for most mergers is the acquisition of more assets so as to increase sales and market share.
Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: Preferred stockholders have priority over common stockholders with respect to dividends, because dividends must be paid on preferred stock before they can be paid on common stock. However, preferred and common stockholders normally have equal priority with respect to liquidating proceeds in the event of bankruptcy.
Answer Options:
a. True
b. False
Correct Answer: b
Answer:
Question: Multinational financial management requires that a. the effects of changing currency values be included in financial analyses. b. legal and economic differences need not be considered in financial decisions because these differences are insignificant. c. political risk should be excluded from multinational corporate financial analyses. d. traditional U.S. and European financial models incorporating the existence of a competitive marketplace not be recast when analyzing projects in other parts of the world. e. cultural differences need not be accounted for when considering firm goals and employee management.
Answer: a. the effects of changing currency values be included in financial analyses.
Question: Which of the following statements is CORRECT? a. In general, the more uncertainty there is about market conditions, the more attractive it may be to wait before making an investment. b. In general, the greater the strategic advantages of being the first competitor to enter a given market, the more attractive it probably is to wait before making an investment. c. In general, the higher the discount rate, the more attractive it probably is to wait before making an investment. d. In general, investment timing options are more valuable than abandonment options. e. In general, abandonment options are rarely seen in the real world.
Answer: a. In general, the more uncertainty there is about market conditions, the more attractive it may be to wait before making an investment.
Question: The graphical probability distribution of ROE for a firm that uses financial leverage would tend to be more peaked than the distribution if the firm used no leverage, other things held constant.
Answer Options:
a. True
b. False
Answer: b. False
Question: Different borrowers have different risks of bankruptcy, and if a borrower goes bankrupt, its lenders will probably not get back the full amount of funds that they loaned. Therefore, lenders charge higher rates to borrowers judged to be more likely to go bankrupt.
Answer Options:
a. True
b. False
Answer: a. True
Question: A firm’s treasurer likes to be in a position to raise funds to support operations whenever such funds are needed, even in “bad times.” This is called “financial flexibility,” and the lower the firm’s debt ratio, the greater its financial flexibility, other things held constant.
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
Answer Options:
a. In general, a firm with low operating leverage also has a small proportion of its total costs in the form of fixed costs.
b. There is no reason to think that changes in the personal tax rate would affect firms’ capital structure decisions.
c. A firm with a relatively high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else equal.
d. Since debt financing raises the firm’s financial risk, increasing a company’s debt ratio will always increase its WACC.
e. Since the cost of debt is generally fixed, increasing the debt ratio tends to stabilize net income.
Correct Answer: c
Answer:
Question: Which of the following statements concerning warrants is most CORRECT?
Answer Options:
a. Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock’s price increases. However, if the option is exercised, the issuing company’s debt declines if warrants are used but remains the same if convertibles are used.
b. Warrants are long-term put options that have value because holders can sell the firm’s common stock at the exercise price regardless of how low the market price drops.
c. Warrants are long-term call options that have value because holders can buy the firm’s common stock at the exercise price regardless of how high the stock’s price has risen.
d. A firm’s investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.
e. A drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital.
Correct Answer: c
Answer: