Answer:
b
Question: The Modigliani and Miller (MM) articles implicitly assumed, among other things, that outside stockholders have the same information about a firm’s future prospects as its managers. That was called “symmetric information,” and it is questionable. The introduction of “asymmetric information” led to the development of the “signaling” theory of capital structure, which postulated that firms are reluctant to issue new stock because investors will interpret such an act as a signal that the firm’s managers are worried about its future. Other actions give off different signals, and the end result is that capital structure is affected by managers’ perceptions about how their financing decisions will affect investors’ views of the firm and thus its value.
Answer Options:
a. True
b. False
Answer:
True
Question: Which of the following statements is CORRECT? A) The current cash flow from existing assets is highly relevant to investors. However, since the value of the firm depends primarily upon its growth opportunities, accounting net income projections from those opportunities are the only relevant future flows with which investors are concerned. B) Two metrics that are used to measure a company’s financial performance are net income and free cash flow. Accountants tend to emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on free cash flows as they do on net income. C) To estimate the net cash provided by operations, depreciation must be subtracted from net income because it is a non-cash charge that has been added to revenue. D) 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 discourage the use of debt financing by corporations. E) If Congress changed depreciation allowances so that companies had to report higher depreciation levels for tax purposes in 2014, this would lower their free cash flows for 2014.
Answer:
B
Question: The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with the present value of the cash inflows.
Answer Options:
a. True
b. False
Answer:
True
Question: A lease-versus-purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset a. is financed with short-term debt. b. is financed with long-term debt. c. is financed with debt whose maturity matches the term of the lease. d. is financed with a mix of debt and equity based on the firm’s target capital structure, i.e., at the WACC. e. is financed with retained earnings.
Answer:
c. is financed with debt whose maturity matches the term of the lease.
Question: Ratio analysis involves analyzing financial statements to help appraise a firm’s financial position and strength. a. True b. False
Answer:
a. True
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:
False
Question: According to Modigliani and Miller (MM), in a world without corporate income taxes the use of debt has no effect on the firm’s value. a. True b. False
Answer:
a. True
Question: Modigliani and Miller (MM), in their second article, took account of taxes, bankruptcy, and other factors that were assumed away in their original article. Once they took account of all these assumptions, they concluded that every firm has a unique optimal capital structure. Moreover, a manager can use the second MM model to determine his or her firm’s optimal debt ratio.
Answer Options:
a. True
b. False
Answer:
b. False
Question: A firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions. a. True b. False
Answer:
a