a. True
b. False
Answer: a. True
Question: Which of the following actions can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm’s capital structure.
Answer Options:
b. The threat of takeover generally increases potential conflicts between stockholders and managers.
c. Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers.
d. The threat of takeovers tends to reduce potential conflicts between stockholders and managers.
e. The creation of the Securities and Exchange Commission (SEC) has eliminated conflicts between managers and stockholders.
Answer: d
Question: Other things held constant, the higher a firm’s target payout ratio, the higher its expected growth rate should be.
a. True
b. False
Answer: False
Question: If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.
a. True
b. False
Answer: True
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: a. True
Question: Your firm uses the residual dividend model to set dividend policy. Market interest rates suddenly rise, and stock prices decline. Your firm’s earnings, investment opportunities, and capital structure do not change. If the firm follows the residual dividend model, then its dividend payout ratio would increase.
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: A 100% stock dividend and a 2:1 stock split should, at least conceptually, have the same effect on the firm’s stock price.
a. True
b. False
Answer: True
Question: The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, if the tax rate on dividends is high relative to that on capital gains, then individuals with low taxable incomes should favor stocks with low payouts and high-income individuals should favor high-payout companies.
Answer Options:
a. True
b. False
Answer: a. True
Question: The Basic earning power ratio (BEP) reflects the earning power of a firm’s assets after giving consideration to financial leverage and tax effects.
a. True
b. False
Answer: b. False
Question: If a firm’s fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
a. The use of debt financing will tend to lower the basic earning power ratio, other things held constant.
b. A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
c. If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.
d. The numerator used in the TIE ratio is earnings before taxes (EBT). EBT is used because interest is paid with post-tax dollars, so the firm’s ability to pay current interest is affected by taxes.
e. All else equal, increasing the total debt to total capital ratio will increase the ROA.
Answer: b. A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
Question: Which of the following items should a company report directly in its monthly cash budget?
a. Its monthly depreciation expense.
b. Cash proceeds from selling one of its divisions.
c. Accrued interest on zero coupon bonds that it issued.
d. New shares issued in a stock split.
e. New shares issued in a stock dividend.
Answer Options:
a. Its monthly depreciation expense.
b. Cash proceeds from selling one of its divisions.
c. Accrued interest on zero coupon bonds that it issued.
d. New shares issued in a stock split.
e. New shares issued in a stock dividend.
Answer: b
Question: A “reverse split” reduces the number of shares outstanding.
a. True
b. False
Answer: True
Question: Debt management ratios show the extent to which a firm’s managers are attempting to magnify returns on owners’ capital through the use of financial leverage.
a. True
b. False
Answer: a. True