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QUESTION 1
- Homemade leverage is:
| the incurrence of debt by a corporation in order to pay dividends to shareholders. | ||
| the exclusive use of debt to fund a corporate expansion project. | ||
| the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage. | ||
| best defined as an increase in a firm’s debt-equity ratio. |
5 points
QUESTION 2
- The best financing choice is the one that:
| sets the debt-to-assets ratio equal to 1. | ||
| trades off the tax disadvantage of debt against the signaling effects of equity. | ||
| maximizes expected cash flows. | ||
| ignores the false comfort of financial flexibility. |
5 points
QUESTION 3
- The basic lesson of the M&M theory is that the value of a firm is dependent upon:
| the firm’s capital structure. | ||
| the total cash flow of the firm. | ||
| minimizing the marketed claims. | ||
| the amount of marketed claims to that firm. |
5 points
QUESTION 4
- In general, the capital structures used by non-financial U.S. firms:
| typically result in debt-to-asset ratios between 60 and 80 percent. | ||
| tend to converge to the same proportions of debt and equity. | ||
| tend to be those that maximize the use of the firm’s available tax shelters. | ||
| vary significantly across industries. |
5 points
QUESTION 5
- Which of the following is NOT a likely financing policy for a rapidly growing business?
| Adopt a modest dividend payout policy that enables the company to finance most of its growth externally. | ||
| Borrow funds rather than limit growth, thereby limiting growth only as a last resort. | ||
| Maintain a conservative leverage ratio to ensure continuous access to financial markets. | ||
| If external financing is necessary, use debt to the point it does not affect financial flexibility. |
5 points
QUESTION 6
- Financial leverage:
increases expected ROE but does not affect its variability.
II. increases breakeven, like operating leverage, but increases the rate of earnings per share growth once breakeven is achieved.
III. is a fundamental financial variable affecting sustainable growth.
IV. increases expected return and risk to owners.
| I and II only | ||
| I and III only | ||
| II and IV only | ||
| II, III, and IV only |
5 points
QUESTION 7
- The term “financial distress costs” includes which of the following?
Direct bankruptcy costs
II. Indirect bankruptcy costs
III. Direct costs related to being financially distressed, but not bankrupt
IV. Indirect costs related to being financially distressed, but not bankrupt
| I only | ||
| I and II only | ||
| III and IV only | ||
| I, II, III, and IV |
5 points
QUESTION 8
- Which of the following factors favor the issuance of equity in the financing decision?
Market signaling
II. Distress costs
III. Management incentives
IV. Financial flexibility
| I and II only | ||
| I and III only | ||
| II and IV only | ||
| II, III, and IV only |
5 points
QUESTION 9
- The interest tax shield has no value when a firm has:
no taxable income.
II. debt-equity ratio of 1.
III. zero debt.
IV. no leverage.
| I and III only | ||
| II and IV only | ||
| I, III, and IV only | ||
| II, III, and IV only |
5 points
QUESTION 10
- As the financial vice president for Squamish Equipment, you have the following information:
For next year, calculate Squamish’s times burden covered ratio if Squamish sells 2 million new shares at $20 a share.
| 1.38 | ||
| 1.60 | ||
| 1.89 | ||
| 2.10 |
