Answer Options:
a. True
b. False
Correct Answer: b
Answer:
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: An important part of the capital budgeting process is the post-audit, which involves comparing the actual results with those predicted by the project’s sponsors and explaining why any differences occurred.
Answer Options:
a. True
b. False
Answer: a. True
Question: Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss, while pure risks are those that can only lead to losses.
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
Answer Options:
a. A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt.
b. The capital structure that minimizes a firm’s weighted average cost of capital is also the capital structure that maximizes its stock price.
c. The capital structure that minimizes the firm’s weighted average cost of capital is also the capital structure that maximizes its earnings per share.
d. If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its WACC.
e. Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted theory would suggest that firms should increase their use of debt.
Correct Answer: b
Answer:
Question: The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.
Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: Which of the following statements is CORRECT?
Answer Options:
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.
Correct Answer: e
Answer:
Question: If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary, this would be a vertical merger.
Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: Since managers’ central goal is to maximize stock price, managers’ personal incentives do not interfere with mergers that would benefit the target firm’s stockholders.
Answer Options:
a. True
b. False
Correct Answer: b
Answer:
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: a. True
Question: A sale and leaseback arrangement is a type of financial, or capital, lease.
Answer Options:
a. True
b. False
Correct Answer: a
Answer:
Question: Companies HD and LD have identical tax rates, total assets, total investor-supplied capital, and returns on investors’ capital (ROIC), and their ROICs exceed their after-tax costs of debt, rd(1 – T). However, Company HD has a higher debt ratio and thus more interest expense than Company LD. Which of the following statements is CORRECT?
Answer Options:
a. Company HD has a higher net income than Company LD.
b. Company HD has a lower ROA than Company LD.
c. Company HD has a lower ROE than Company LD.
d. The two companies have the same ROA.
e. The two companies have the same ROE.
Correct Answer: b
Answer:
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
Correct Answer: a
Answer:
Question: The value of a stock option depends on all of the following EXCEPT: a. Exercise price. b. Variability of the stock price. c. Length of time until option expiration. d. Risk-free rate of interest. e. Bond price.
Answer: e. Bond price
Question: Since a manager’s central goal is to maximize the firm’s stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.
Answer Options:
a. True
b. False
Correct Answer: b
Answer: