QUESTION 21 One implication of the tradeoff theories of capital structure decisi

Question

QUESTION 21

One implication of the tradeoff theories of capital structure decision is that firms that are likely to pay taxes at high rates should carry more debt than firms in lower tax brackets.

True

False

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QUESTION 22

One implication of the tradeoff theories of capital structure decision is that risky firms, as measures by the variability of asset returns, ought to borrow more, other things equal.

True

False

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QUESTION 23

The pecking order theory of capital structure is based on the asymmetric information theory that the announcement of a stock offering by a mature firm is taken as a signal that the firm's prospects as seen by its management are not bright.

True

False

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QUESTION 24

One implication of the pecking order theory of capital structure is that profitable firms have more debt because they don't need outside money.

True

False

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QUESTION 25

One would normally expect the price of stock to go up by approximately the amount of the dividend on the ex-dividend date.

True

False

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QUESTION 26

One implication of the clientele effect is that high-tax-bracket investors tend to hold relatively high dividend-yield stocks.

True

False

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QUESTION 27

It was found that stock prices tend to increase after announcements of stock repurchase by tender offer.

True

False

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QUESTION 28

________ are the markets in which corporations raise new capital.

Primary markets

Secondary markets

Money markets

Mortgage markets

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QUESTION 29

_________ are the markets for short-term debts.

Capital markets

Money markets

Secondary markets

Mortgage markets

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QUESTION 30

Total cash flow or free cash flow is ____________________.

without cost to the firm.

net income plus taxes.

an increase in net working capital.

cash flow in excess of that required to fund profitable capital projects.

None of the above.

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QUESTION 31

The dividend growth rate is equal to the product of what two ratios?

ROA, current ratio

ROE, dividend payout ratio

ROE, retention ratio

PM, ROE

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QUESTION 32

A reduction in the sales of an existing product caused by the introduction of a new product is an example of a(n) _________.

sunk cost

opportunity cost

erosion cost

fixed cost

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QUESTION 33

An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the Capital Market Line has to

lend some of her money at the risk-free rate and invest the rest in the optimal risky portfolio.

borrow some money at the risk-free rate and invest it in the optimal risky portfolio

invest only in the risky securities.

hold a portfolio which is not diversified.

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QUESTION 34

If other things remain the same, diversification is more effective when _________.

securities returns are negatively correlated.

securities returns are uncorrelated.

securities returns are positively correlated.

securities returns are high.

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QUESTION 35

The optimal risky portfolio can be identified by finding .

the minimum variance point on the efficient frontier

the maximum return point on the efficient frontier

the tangency point of the capital market line and the efficient frontier

none of the above answers is correct.

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QUESTION 36

The present value (PV) break-even point is better than the accounting break-even point because

PV break-even point is the same as the sensitivity analysis

PV break-even point covers the economic opportunity costs of the investment

PV break-even point covers the fixed costs of production, which the accounting break-even point does not.

PV break-even point covers the variable costs of production, which the accounting break-even point does not.

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QUESTION 37

The date on which the right to the next dividend no longer accompanies a stock is called _________.

declaration date

holder-of-record date

ex-dividend date

payment date

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QUESTION 38

Which of the following is not a hypothesis to explain the behavior of stock price after stock repurchases?

Information or Signaling Hypothesis

Leverage Hypothesis

Tax Differential Hypothesis

Efficient Market Hypothesis

Primary markets

Secondary markets

Money markets

Mortgage markets

Explanation / Answer

21. true

22. False, Risky Firms ought to borrow less

23. True

24. True

25. True

26. False

27. True

28. Primary Market

29.Money Market

30.

cash flow in excess of that required to fund profitable capital projects

31. ROE, retention ratio

32.erosion cost

33.borrow some money at the risk-free rate and invest it in the optimal risky portfolio

34. when negatively correlated

35.the tangency point of the capital market line and the efficient frontie

36.PV break-even point covers the economic opportunity costs of the investment

37.ex-dividend date

38

Tax Differential Hypothesis

cash flow in excess of that required to fund profitable capital projects

31. ROE, retention ratio

32.erosion cost

33.borrow some money at the risk-free rate and invest it in the optimal risky portfolio

34. when negatively correlated

35.the tangency point of the capital market line and the efficient frontie

36.PV break-even point covers the economic opportunity costs of the investment

37.ex-dividend date

38

Tax Differential Hypothesis

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