Answer:
a. are usually more stable than earnings.
Question: Which of the following statements is CORRECT? a. As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS. b. The optimal capital structure simultaneously maximizes EPS and minimizes the WACC. c. The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price. d. The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC. e. The optimal capital structure simultaneously maximizes the stock price and minimizes the WACC.
Answer:
e
Question: Modigliani and Miller’s first article led to the conclusion that capital structure is “irrelevant” because it has no effect on a firm’s value. However, that article was criticized because it assumed that no taxes existed. MM then revised their original article to include corporate taxes, and this model led to the conclusion that a firm’s value would be maximized if it used (almost) 100% debt.
Answer Options:
a. True
b. False
Answer:
a. True
Question: The NYSE is defined as a “primary” market because it is one of the largest and most important stock markets in the world.
Answer Options:
a. True
b. False
Answer:
b. False
Question: Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both firms finance using only debt and common equity and total assets equal total invested capital. Both companies have positive net incomes. Company HD has a higher total debt to total capital ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT? a. Company HD pays less in taxes. b. Company HD has a lower equity multiplier. c. Company HD has a higher ROA. d. Company HD has a higher times-interest-earned (TIE) ratio. e. Company HD has more net income.
Answer:
a. Company HD pays less in taxes.
Question: Modigliani and Miller’s first article led to the conclusion that capital structure is “irrelevant” because it has no effect on a firm’s value.
Answer Options:
a. True
b. False
Answer:
True
Question: Heavy use of off-balance-sheet lease financing will tend to a. make a company appear more risky than it actually is because its stated debt ratio will be increased. b. make a company appear less risky than it actually is because its stated debt ratio will appear lower. c. affect a company’s cash flows but not its degree of risk. d. have no effect on either cash flows or risk because the cash flows are already reflected in the income statement. e. affect the lessee’s cash flows but only due to tax effects.
Answer:
b. make a company appear less risky than it actually is because its stated debt ratio will appear lower.
Question: You own 100 shares of Troll Brothers’ stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split? a. You will have 200 shares of stock, and the stock will trade at or near $60 a share. b. You will have 200 shares of stock, and the stock will trade at or near $120 a share. c. You will have 100 shares of stock, and the stock will trade at or near $60 a share. d. You will have 50 shares of stock, and the stock will trade at or near $160 a share. e. You will have 50 shares of stock, and the stock will trade at or near $600 a share.
Answer:
a. You will have 200 shares of stock, and the stock will trade at or near $60 a share.
Question: Other things held constant, the lower a firm’s tax rate, the more logical it is for the firm to use debt.
Answer Options:
a. True
b. False
Answer:
b. False
Question: The firm’s target capital structure should do which of the following? a. Maximize the earnings per share (EPS). b. Minimize the cost of debt (rd). c. Obtain the highest possible bond rating. d. Minimize the cost of equity (rs). e. Minimize the weighted average cost of capital (WACC).
Answer:
e
Question: Which of the following statements is CORRECT? a. A reduction in inventories would have no effect on the current ratio. b. An increase in inventories would have no effect on the current ratio. c. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase. d. A reduction in the inventory turnover ratio will generally lead to an increase in the ROE. e. If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline.
Answer:
c. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
Question: A firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Other things held constant, firms with more stable and predictable sales tend to use more debt than firms with less stable sales.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?
Answer:
a. An increase in the corporate tax rate
Question: Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the company’s total assets or operating income. Which of the following effects would occur as a result of this action? a. The company’s current ratio increased. b. The company’s times interest earned ratio decreased. c. The company’s basic earning power ratio increased. d. The company’s equity multiplier increased. e. The company’s total debt to total capital ratio increased.
Answer:
a. The company’s current ratio increased.
Question: Modigliani and Miller (MM) won Nobel Prizes for their work on capital structure theory.
Answer Options:
a. True
b. False
Answer:
True
Question: A firm’s CFO is considering increasing the target debt ratio, which would also increase the company’s interest coverage ratio.
Answer:
False