Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: Preferred stock normally has no voting rights. However, most preferred issues stipulate that the preferred stockholders can elect a minority number of the directors if the preferred dividend is omitted.
Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: Your firm is currently 100% equity financed. The CFO is considering a recapitalization plan under which the firm would issue long-term debt with an after-tax yield of 9% and use the proceeds to repurchase some of its common stock. The recapitalization would not change the company’s total investor-supplied capital, the size of the firm (i.e., total assets), and it would not affect the firm’s return on investors’ capital (ROIC), which is 15%. The CFO believes that this recapitalization would reduce the firm’s WACC and increase its stock price. Which of the following would be likely to occur if the company goes ahead with the recapitalization plan?
Answer Options:
a. The company’s net income would increase.
b. The company’s earnings per share would decline.
c. The company’s cost of equity would increase.
d. The company’s ROA would increase.
e. The company’s ROE would decline.
Correct Answer: c
Questio 316
A major contribution of the Miller model is that it demonstrates, other things held constant, that
Answer Options:
a. personal taxes increase the value of using corporate debt.
b. personal taxes lower the value of using corporate debt.
c. personal taxes have no effect on the value of using corporate debt.
d. financial distress and agency costs reduce the value of using corporate debt.
e. debt costs increase with financial leverage.
Correct Answer: b
Answer:
Question: Interest rate swaps allow a firm to exchange fixed for floating-rate payments, but a swap cannot reduce actual net interest expenses.
Answer Options:
a. True
b. False
Answer: b. False
Question: Preferred stock can provide a financing alternative for some firms when market conditions are such that they cannot issue either pure debt or common stock at any reasonable cost.
Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: Other things held constant, an increase in financial leverage will increase a firm’s market (or systematic) risk as measured by its beta coefficient.
Answer Options:
a. True
b. False
Answer: a. True
Question: A firm’s optimal capital budget consists of all independent projects with positive NPVs plus those mutually exclusive projects that have the highest positive NPVs.
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following statements is most CORRECT?
Answer Options:
a. Preferred stock generally has a higher component cost of capital to the firm than does common stock.
b. By law in most states, all preferred stock must be cumulative, meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm’s common stock.
c. From the issuer’s point of view, preferred stock is less risky than bonds.
d. Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less.
e. Unlike bonds, preferred stock cannot have a convertible feature.
Correct Answer: c
Answer:
Question: An investor who “writes” a call option against stock held in his or her portfolio is selling a(n)
Answer Options:
a. Straddle option.
b. Put option.
c. Out-of-the-money option.
d. Naked option.
e. Covered option.
Answer: e. Covered option
Question: Business risk is affected by a firm’s operations. Which of the following is NOT directly associated with (or does not directly contribute to) business risk? a. Demand variability. b. Sales price variability. c. The extent to which operating costs are fixed. d. The extent to which interest rates on the firm’s debt fluctuate. e. Input price variability.
Answer: d. The extent to which interest rates on the firm’s debt fluctuate.
Question: A conglomerate merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship.
Answer Options:
a. True
b. False
Correct Answer: b
Answer:
Question: Preferred stock typically has a par value, and the dividend is often stated as a percentage of par. The par value is also important in the event of liquidation, as the preferred stockholders are generally entitled to receive the par value before anything is given to the common stockholders.
Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: If the inflation rate in the United States is greater than the inflation rate in Britain, other things held constant, the British pound will
Answer Options:
a. appreciate against the U.S. dollar.
b. depreciate against the U.S. dollar.
c. remain unchanged against the U.S. dollar.
d. appreciate against other major currencies.
e. appreciate against the dollar and other major currencies.
Answer: b. depreciate against the U.S. dollar.
Question: A foreign currency will, on average, depreciate against the U.S. dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.
Answer Options:
a. True
b. False
Answer: a. True
Question: Wahal Corporation uses the NPV method when selecting projects, and it does a reasonably good job of estimating projects’ sales and costs. However, it never considers any real options that might be associated with projects. Which of the following statements is most likely to describe its situation? a. Its estimated capital budget is probably too small, because projects’ NPVs are often larger when real options are taken into account. b. Its estimated capital budget is probably too large due to its failure to include abandonment and growth options. c. Omitting real options from the capital budgeting process has no adverse effect on the estimation of the optimal capital budget. d. Failing to consider abandonment and flexibility options probably makes the optimal capital budget too small, but failing to consider growth and timing options probably makes the optimal capital budget too large, so it is unclear what impact not considering real options has on the overall capital budget. e. Real options should not have any effect on the size of the optimal capital budget.
Answer: a. Its estimated capital budget is probably too small, because projects’ NPVs are often larger when real options are taken into account.
Question: If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market, then the forward currency is said to be selling at a premium to the spot rate.
Answer Options:
a. True
b. False
Answer: a. True
Question: Modigliani and Miller’s first article led to the conclusion that capital structure is extremely important, and that every firm has an optimal capital structure that maximizes its value and minimizes its cost of capital.
Answer Options:
a. True
b. False
Answer: b. False
Question: If a firm borrows money, it is using financial leverage.
Answer Options:
a. True
b. False
Answer: a. True
Question: Gleason Research regularly takes real options into account when evaluating its proposed projects. Specifically, it considers the option to abandon a project whenever it turns out to be unsuccessful (the abandonment option), and it evaluates whether it is better to invest in a project today or to wait and collect more information (the investment timing option). Assume the proposed projects can be abandoned at any time without penalty. Which of the following statements is CORRECT? a. The abandonment option tends to reduce a project’s NPV. b. The abandonment option tends to reduce a project’s risk. c. If there are important first-mover advantages, this tends to increase the value of waiting a year to collect more information before proceeding with a proposed project. d. A project can either have an abandonment option or an investment timing option, but never both. e. Investment timing options always increase the value of a project.
Answer: b. The abandonment option tends to reduce a project’s risk.
Question: According to Modigliani and Miller (MM), in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.
Answer Options:
a. True
b. False
Answer: b. False
Question: Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis.
Answer Options:
a. True
b. False
Answer: b. False
Question: In theory, reducing the volatility of its cash flows will always increase a company’s value.
Answer Options:
a. True
b. False
Answer: b. False
Question: Which of the following is NOT an example of a derivative security? a. Futures. b. Options. c. Swaps. d. Forward contracts. e. Preferred stock.
Answer: e. Preferred stock