Answer Options:
a. True
b. False
Answer: a. True
Question: The CAPM is a multi-period model that takes account of differences in securities’ maturities, and it can be used to determine the required rate of return for any given level of systematic risk.
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.
Answer Options:
a. True
b. False
Answer: a. True
Question: EBIT stands for earnings before interest and taxes, and it is often called “operating income.”
Answer Options:
a. True
b. False
Answer: a. True
Question: The slope of the SML is determined by investors’ aversion to risk. The greater the average investor’s risk aversion, the steeper the SML.
Answer Options:
a. True
b. False
Answer: a. True
Question: If the yield curve is upward sloping, then short-term debt will be cheaper than long-term debt. Thus, if a firm’s CFO expects the yield curve to continue to have an upward slope, this would tend to cause the current ratio to be relatively low, other things held constant.
Answer Options:
a. True
b. False
Answer: a. True
Question: The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt. Added risk stems from (1) the greater variability of interest costs on short-term than long-term debt and (2) the fact that even if its long-term prospects are good, the firm’s lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans.
Answer Options:
a. True
b. False
Answer: a. True
Question: The balance sheet measures the flow of funds into and out of various accounts over time, while the income statement measures the firm’s financial position at a point in time.
Answer Options:
a. True
b. False
Answer: b. False
Question: The prime rate charged by big money center banks at any one time is likely to vary greatly (for example, as much as 2 to 4 percentage points) across banks due to banks’ ability to differentiate themselves and because different banks operate in different parts of the country.
Answer Options:
a. True
b. False
Answer: b. False
Question: The income statement shows the difference between a firm’s income and its costs—i.e., its profits—during a specified period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm’s reported profits and its actual cash flow for the same period.
Answer Options:
a. True
b. False
Answer: a. True
Question: Assume that two investors each hold a portfolio, and that portfolio is their only asset. Investor A’s portfolio has a beta of minus 2.0, while Investor B’s portfolio has a beta of plus 2.0. Assuming that the unsystematic risks of the stocks in the two portfolios are the same, then the two investors face the same amount of risk. However, the holders of either portfolio could lower their risks, and by exactly the same amount, by adding some “normal” stocks with beta = 1.0.
Answer Options:
a. True
b. False
Answer: b. False
Question: The facts that (1) no explicit interest is paid on accruals and (2) the firm can vary the level of these accounts at will makes them an attractive source of funding to meet the firm’s working capital needs.
Answer Options:
a. True
b. False
Answer: b. False
Question: If you plotted the returns on a given stock against those of the market, and if you found that the slope of the regression line was negative, the CAPM would indicate that the required rate of return on the stock should be greater than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue into the future.
Answer Options:
a. True
b. False
Answer: b. False
Question: If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow.
Answer Options:
a. True
b. False
Answer: b. False
Question: The rate used to discount projected merger cash flows should be the overall cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.
Answer Options:
a. True
b. False
Answer: a. True
Question: When estimating the cost of equity by use of the CAPM, three potential problems are (1) whether to use long-term or short-term rates for RF, (2) whether or not the historical beta is the beta that investors use when evaluating the stock, and (3) how to measure the market risk premium, RPM. These problems leave us unsure of the true value of rs.
Answer Options:
a. True
b. False
Answer: a. True
Question: The cost of debt, rd, is normally less than rs, so rd(1 – T) will normally be much less than rs. Therefore, as long as the firm is not completely debt financed, the weighted average cost of capital (WACC) will normally be greater than rd(1 – T).
Answer Options:
a. True
b. False
Answer: a. True
Question: The cost of debt is equal to one minus the marginal tax rate multiplied by the interest rate on new debt.
Answer Options:
a. True
b. False
Answer: a. True
Question: The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.
Answer Options:
a. True
b. False
Answer: b. False
Question: The value of the target firm is calculated by discounting residual cash flows that belong to the acquiring firm’s shareholders at the target’s cost of equity reflecting any changes to its capital structure as a result of the merger.
Answer Options:
a. True
b. False
Answer: a. True