Finance multiple choice questions In Tutorial Library
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TITLE: Finance multiple choice questions
UNIVERSITY / INSTITUTE: Purdue University
CLASS / COURSE: MGMT 310
QUESTION DESCRIPTION:
Questions: 34
1. A firm's capital structure is represented by its mix of:
a. Assets.
b. Liabilities and equity.
c. Assets and liabilities.
d. Assets, liabilities and equity.
e. None of the above
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2.
(Points: 1)
Restructuring a firm involves changing the:
a. Debt ratio.
b. Dividend payout ratio.
c. Managerial personnel.
d. Interest rate on debt.
e. None of the above
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3.
(Points: 1)
One advantage of debt financing over equity financing is:
a. Tax deductible dividends.
b. Tax deductible interest.
c. Tax deductible principal repayment.
d. Tax free interest income.
e. None of the above
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4.
(Points: 1)
Those who benefit from the interest tax shield are:
a. Debt holders.
b. Equity holders.
c. Both debtholders and equity holders.
d. Only the firm's customers benefit from the interest tax shield.
e. None of the above
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5.
(Points: 1)
Which of the following is an example of restructuring the firm?
a. Dividends are increased from $1 to $2 per share.
b. A new investment increases the firm's business risk.
c. New equity is issued and the proceeds used to repay debt.
d. A new board of directors is elected to the firm.
e. None of the above
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6.
(Points: 1)
If a change in capital structure causes a firm's cost of capital to fall, then
a. The value of the firm should rise
b. The value of the firm should fall
c. The value of the firm will be unaffected
d. The cost of equity would rise
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7.
(Points: 1)
The higher the degree of operating leverage in a firm,
a. The greater will be the impact of a change in revenues on the firm's operating income
b. The smaller will be the impact of a change in revenues on the firm's operating income
c. The greater will be the impact of a change in operating income on the firm's earnings per share
d. The greater will be the impact of a change in revenues would have on the firm's earnings per share
e. None of the above is a correct statement
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8.
(Points: 1)
The higher the degree of financial leverage in a firm,
a. The greater will be the impact of a change in revenues on the firm's operating income
b. The smaller will be the impact of a change in revenues on the firm's operating income
c. The greater will be the impact of a change in operating income on the firm's earnings per share
d. The greater will be the impact of a change in revenues would have on the firm's earnings per share
e. None of the above is a correct statement
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9.
(Points: 1)
A firm is expected to generate $1.5 million in operating income and pay $250,000 in interest. Ignoring taxes, this will generate $12.50 earnings per share. What will happen to EPS if operating income increases to $2.0 million? Hint: Before you calculate, first determine the number of shares outstanding based on the given EPS of $12.50.
a. EPS increase to $15.63.
b. EPS increase to $16.67.
c. EPS increase to $17.50.
d. EPS increase to $20.00.
e. None of the above
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10.
(Points: 1)
A firm issues 100,000 shares with a total market value of $5,000,000. The firm's market value of debt is also of equal amount, i.e. $5,000,000. The firm is expected to generate $1.5 million in operating income and pay $250,000 in interest. Ignoring taxes, this will generate $12.50 earnings per share. What will happen to EPS if the firm's borrowing and interest expense increases by 75% and the number of shares in circulation is cut by 75% (assuming that the share price remains unchanged with this change in capital structure)?
a. EPS decrease to $10.00.
b. EPS decrease to $11.67.
c. EPS increase to $15.00.
d. EPS increase to $42.50.
e. None of the above
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11.
(Points: 1)
The stability of a firm's operating income is the focus of:
a. Financial leverage.
b. Weighted-average cost of capital.
c. Capital structure.
d. Business risk. *** this is the correct answer!
e. None of the above
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12.
(Points: 1)
An increase in a firm's financial leverage will, all things equal,
a. increase the variability of the firm's in earnings per share.
b. reduce the operating risk of the firm.
c. increase the value of the firm in a non-MM world.
d. increase the WACC.
e. None of the above
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13.
(Points: 1)
Financial risk refers to the:
a. risk of owning equity securities.
b. risk faced by equity holders when debt is used.
c. general business risk of the firm.
d. possibility that interest rates will increase.
e. None of the above
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14.
(Points: 1)
According to MM Proposition II, as a firm's debt-to-equity ratio decreases:
a. its financial risk increases.
b. its operating risk increases.
c. the required rate of return on equity increases.
d. the required rate of return on equity decreases.
e. None of the above
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15.
(Points: 1)
An implicit cost of adding debt to the capital structure is that it:
a. adds interest expense to the operating statement.
b. increases the required return on equity.
c. reduces the expected return on assets.
d. decreases the firm's beta.
e. None of the above
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16.
(Points: 1)
What is the amount of the annual interest tax shield for a firm with $3 million in debt that pays 12% interest if the firm is in the 35% tax bracket?
a. $126,000
b. $234,000
c. $360,000
d. $1,050,000
e. None of the above
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17.
(Points: 1)
According to M&M, when taxes are considered, the value of a levered firm equals the value of the:
a. unlevered firm.
b. unlevered firm plus the value of the debt.
c. unlevered firm plus the present value of the tax shield.
d. unlevered firm plus the value of the debt plus the value of the tax shield.
e. None of the above
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18.
(Points: 1)
With a tax rate of 35%, calculate the WACC for a firm that pays 10% on its debt, requires an 18% rate of return on its equity, and finances 45% of assets with debt.
a. 14.00%
b. 14.40%
c. 18.20%
d. 12.83%
e. None of the above
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19.
(Points: 1)
What is the after-tax cost of debt for a firm in the 35% tax bracket that pays 15% on its debt?
a. 5.25%
b. 9.75%
c. 12.17%
d. 20.25%
e. None of the above
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20.
(Points: 1)
In the tradeoff theory of capital structure, the cost of financial distress refers to
a. The cost associated with bankruptcy
b. The transaction cost associated with raising new debt
c. The cost of debt
d. None of the above
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21.
(Points: 1)
The present value of the costs of financial distress increases with increases in the debt ratio because the:
a. expected return on assets increases.
b. present value of the interest tax shield is greater.
c. equity tax shield is depleted.
d. probability of default and/or bankruptcy is greater.
e. None of the above
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22.
(Points: 1)
According to the tradeoff theory,
a. As the debt-to-equity ratio FALLS, there is a trade-off between the interest tax savings and bankruptcy, resulting in the lowest cost of common equity
b. A RISE in the debt-to-equity ratio would always lead to an increase in the firm's WACC, which would cause the firm's value to fall
c. As the debt-to-equity ratio RISES, there is a trade-off between the interest tax savings and bankruptcy, resulting in an optimal capital structure
d. None of the above
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23.
(Points: 1)
The pecking order theory of capital structure suggests the following order of financing:
a. internal financing, debt issue, equity issue.
b. internal financing, equity issue, debt issue.
c. debt issue, equity issue, internal financing.
d. equity issue, internal financing, debt issue.
e. None of the above
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24.
(Points: 1)
According to the pecking order theory, managers will often choose to finance with:
a. new equity rather than debt, due to bankruptcy costs.
b. debt rather than new equity, to avoid reduced share price.
c. debt rather than retained earnings, to lower the WACC.
d. new equity rather than debt, to strengthen EPS.
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25.
(Points: 1)
After a 3-for-2 stock split, Brandon Corp paid a dividend of 25¢ per new share. This amount represents a 5% increase over last year's pre-split dividend. What was last year's dividend per share?
a. $0.1587
b. $0.238
c. $0.357
d. $0.5357
e. None of the above
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26.
(Points: 1)
Gordon and Lintner believe that the required rate of return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption that
a. investors are indifferent between dividends and capital gains.
b. investors require that the dividend yield and capital gains yield be a fixed amount.
c. capital gains are taxed at a higher rate than dividends.
d. investors view dividends as being less risky than potential future capital gains.
e. investors value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains.
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27.
(Points: 1)
Based on the signaling theory of dividend policy, a decrease in a firm's willingness to pay dividends is likely to result from an increase in its
a. earnings stability
b. access to capital markets
c. profitable investment opportunities
d. collection of accounts receivable
e. stock price
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28.
(Points: 1)
A stock split will cause a change in the total dollar amounts shown in which of the following balance sheet accounts?
a. Cash
b. Common stock
c. Paid-in capital
d. Retained earnings
e. None of the above
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29.
(Points: 1)
You currently own 100 shares of a stock. The stock currently trades at $120 per share. The company is contemplating a 2-for-1 stock split. Which of the following best describes your position after the proposed stock split takes place?
a. You will have 200 shares of stock, and the stock will trade at or near $120 per share.
b. You will have 200 shares of stock, and the stock will trade at or near $60 a share.
c. You will have 100 shares of stock, and the stock will trade at or near $60 a share.
d. You will have 50 shares of stock, and the stock will trade at or near $120 a share.
e. No effect on the number of shares, price per share, and market value of stock
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30.
(Points: 1)
If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for that year (along with new debt according to the optimal debt ratio), the firm should pay:
a. No dividends except out of past retained earnings
b. No dividends to common stock holders
c. Dividends, in effect, out of a new issue of common stock
d. Dividends by borrowing the money
e. Either c or d above could be used
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31.
(Points: 1)
M&M argued that dividend policy is irrelevant. On the other hand, Gordon-Lintner argued that dividend policy does matter. Gordon-Lintner's argument rests on the contention that:
a. the required rate of return on the firm's equity is constant for any dividend policy
b. because of perceived risk differences, investors value a dollar of dividends more highly than a dollar of expected capital gains.
c. investors, because of tax differentials, value a dollar of expected capital gains more highly than a dollar of dividends.
d. most investors will reinvest rather than spend dividends, so it would save investors money (taxes) if corporations simply reinvested earnings rather than paid them out as dividends
e. None of the above is correct
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32.
(Points: 1)
David Peterson & Co. has a capital budget of $1,200,000. The company wants to maintain a target capital structure, which calls for 60 percent debt and 40 percent equity. The company forecasts that its net income this year will be $600,000. If the company follows a residual dividend policy, what will be its payout ratio?
a. 20%
b. 40%
c. 60%
d. 80%
e. None of the above
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33.
(Points: 1)
For this and the next question. Caesar Machinery is a large machine shop in the southeast side of town. The company's capital budget for next fiscal year is $60 million. Its optimal capital structure calls for a debt ratio of 60 percent. The company's earnings before interest and taxes (EBIT) are $98 million for the year. The firm has $200 million in assets, pays an average interest of 10 percent on all its debt, and has a marginal tax rate of 35 percent. The firm maintains a residual dividend policy and will keep its optimal capital structure intact. Determine the company's net income for the year
a. $86.00
b. $55.90
c. $67.90
d. $31.90
e. None of the above
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34.
(Points: 1)
Calculate residual dividend
a. $86.00
b. $55.90
c. $67.90
d. $31.90
e. None of the above
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SOLUTION DESCRIPTION: Completed Solution is attached. Click on Buy button and then download file to get full solution.
SUBJECTS / CATEGORIES:
1. Finance
2. Financial Management
3. Accounting
4. Corporate Finance
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