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FIN EXAM 2
| Question | Answer |
|---|---|
| With respect to the CAPM, which one of the following statements is correct? | CAPM is used quite frequently by firms in their capital budgeting processes. |
| If two firms are equivalent in all other respects, an analyst should expect the beta of the levered firm’s common stock to be __________blank the beta of the unlevered firm’s the common stock. | greater than |
| Companies will generally have a __________blank beta if their: | high; sales are highly dependent on the market cycle. |
| A firm with high operating leverage has | high fixed costs in its production process. |
| To determine the appropriate cost of capital to employ when computing the present value of a project, an analyst should use the rate that is earned on: | a financial asset of comparable risk. |
| An all-equity firm is evaluating a capital project that has the same level of risk as the firm. The project should be accepted if its: | internal rate of return exceeds the firm’s cost of equity capital |
| The discounted payback period of a project will decrease whenever the: | amount of each cash inflow is increased |
| The net present value method of capital budgeting analysis does all of the following except: | provide a specific anticipated rate of return. |
| If a project has a net present value equal to zero, then: | any delay in receiving the projected cash inflows will cause the project’s NPV to be negative. |
| How should a profitability index of zero be interpreted? | The project’s cash flows subsequent to the initial cash flow have a present value of zero. |
| The elements that cause problems with the use of the IRR in projects that are mutually exclusive are referred to as the: | timing and scale problems. |
| The modified internal rate of return: | is computed by combining cash flows until only one change in sign remains. |
| A project which is designed to improve the manufacturing efficiency of a firm but will generate no additional sales revenue is referred to as a(n) __________blank project. | cost-cutting |
| When identifying all the incremental cash flows related to a proposed project, and analyst must: | eliminate any cost which has previously been incurred so that it can be omitted from the analysis of the project. |
| The equivalent annual cost method is most useful in determining: | which one of two machines to purchase when the machines are mutually exclusive, have differing lives, and will be replaced. |
| the pretax salvage value of an asset is equal to the: | market value. |
| Changes in net working capital: | can affect the cash flows of a project every year of the project's life. |
| The increase in buying power you experience as a result of owning an investment is referred to as the __________blank rate of return. | real |
| For a profitable firm, an increase in __________blank expense will increase operating cash flow. | depreciation |
| Assume a firm has no interest expense or extraordinary items. Given this, the operating cash flow can be computed as: | Net Income + Depreciation |
| The ability of shareholders to undo the dividend policy of a firm and create an alternative dividend payment policy by reinvesting dividends or selling shares of stock is referred to as: | homemade dividends |
| Which one of the following statements is true? | Firms should never give up a positive NPV project to increase a dividend. |
| A stock split: | does not affect the total book value of any of the equity accounts. |
| Probably the best argument in favor of a reverse stock split is | maintain a minimum share price as set by a stock exchange. |
| All else equal, a stock dividend will __________blank the number of shares outstanding and __________blank the value per share. | increase; decrease |
| A(n) __________blank is simultaneously a cash payment shareholders, an alternative to cash dividends, and a method used to pay a firm’s earnings to shareholders. | stock repurchase |
| By employing __________blank, a firm can list its stock on a stock exchange without the help of an underwriter. | a direct listing |
| Which one of the following is not one of the four main functions provided by underwriters? | auditing the financial statements |
| Under the __________blank method, the underwriter buys the entire issue, while under the __________blank method, the underwriter does not purchase the shares but merely acts as an agent. | firm commitment; best efforts |
| Assuming everything else is constant, when a stock goes ex-rights the stock price should: | decrease since the stockholder is losing an option |
| All the following are major requirements needed to qualify for shelf registration except: | having no violations of the Securities Act of 1933 in the past three years. |
| A manager should attempt to maximize the value of the firm by changing the capital structure if and only if the value of the firm increases: | as a result of the change |
| According to __________blank the value of the levered firm equals the value of the unlevered firm. | MM Proposition I with no tax |
| MM Proposition I1 without taxes proposes that: | leverage does not affect the value of the firm. |
| The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called: | homemade leverage. |
| According to MM Proposition II with no taxes, the: | required return on equity is a linear function of the firm’s debt-equity ratio. |
| MM Proposition II with taxes: | reveals that the tax shield on debt causes an increase in the value of a firm. |
| with respect to beta, which is true | the sample size used to compute beta may be too small to yield a reliable result |
| ___ cash flows are the changes in a firms future cash flows that are a direct result of accepting a project | incremental |
| firms should never give up a positive ___ project to increase a dividend | NPV |
| before the ___ date, a purchaser of a stock is entitled to receive a declared dividend but, on or after that date they cannot | ex-dividend |
| which of the following related to debt financing is correct? | private placements generally have longer maturities than term loans |
| assume a firm issued securities through an agreement where investment bakers sold as many shares as possible at a fixed price. this issue would be classified as | best efforts cash offer |
| according to the pecking-order theory, a firm's leverage ratio is determined by | the firms financing needs |
| which of the following is not implied by the pecking-order theory | Companies prefer to borrow up to the point where the financial distress costs offset the tax benefit of debt. |
Created by:
haileykaras