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Question: Which of the following statements is most CORRECT?
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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.
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Question: An increase in the debt ratio will generally have no effect on which of these items? Business risk. Total risk. Financial risk. Market risk.
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Question: Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?
Answer Choices:
a. Increase the dividend payout ratio for the upcoming year.
b. Increase the percentage of debt in the target capital structure.
c. Increase the proposed capital budget.
d. Reduce the amount of short-term bank debt in order to increase the current ratio.
e. Reduce the percentage of debt in the target capital structure.
Answer:
b. Increase the percentage of debt in the target capital structure
Question: Which of the following statements is CORRECT? Increasing its use of financial leverage is one way to increase a firm’s return on investors’ capital (ROIC). If a firm lowered its fixed costs but increased its variable costs by just enough to hold total costs at the present level of sales constant, this would increase its operating leverage. The debt ratio that maximizes expected EPS generally exceeds the debt ratio that maximizes share price. If a company were to issue debt and use the money to repurchase common stock, this would reduce its return on investors’ capital (ROIC). (Assume that the repurchase has no impact on the company’s operating income.) If a change in the bankruptcy code made bankruptcy less costly to corporations, this would tend to reduce corporations’ debt ratios.
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Question: Other things held constant, which of the following events would be most likely to encourage a firm to increase the amount of debt in its capital structure? Its sales are projected to become less stable in the future. The bankruptcy laws are changed in a way that would make bankruptcy more costly to the firm and its stockholders. Management believes that the firm’s stock is currently overvalued. The firm decides to automate its factory with specialized equipment and thus increase its use of operating leverage. The corporate tax rate is increased.
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Question: Which of the following statements is CORRECT? Generally, debt ratios do not vary much among different industries, although they do vary among firms within a given industry. Electric utilities generally have very high common equity ratios because their revenues are more volatile than those of firms in most other industries. Airline companies tend to have very volatile earnings, and as a result they generally have high target debt-to-equity ratios. Wide variations in capital structures exist both between industries and among individual firms within given industries. These differences are caused by differing business risks and also managerial attitudes. Since most stocks sell at or very close to their book values, book value capital structures are typically adequate for use in estimating firms’ weighted average costs of capital.
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Question: The Miller model begins with the Modigliani and Miller (MM) model with corporate taxes and then adds personal taxes.
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Question: Which of the following statements is CORRECT?
Answer Choices:
a. Other things held constant, the more debt a firm uses, the higher its operating margin will be.
b. 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.
c. Other things held constant, the more debt a firm uses, the higher its profit margin will be.
d. Other things held constant, the higher a firm’s total debt to total capital ratio, the higher its TIE ratio will be.
e. Debt management ratios show the extent to which a firm’s managers are attempting to reduce risk through the use of financial leverage. The higher the total debt to total capital ratio, the lower the risk.
Answer:
b