Which of the following statements is correct? es that are \"capital intensive\"

Question

Which of the following statements is correct? es that are "capital intensive" are more likely to rely on debt financing. pant mpanies with larg e tax-loss carry forwards" are more likely to rely on debt financing Companies that are "capital intensive" are less likely to rely on debt financing D. C. Companics whose sales are very sensitive to changes in the "business cycle" are more likely to rely on debt financing (use more debt in its capital structure) 8. According to the "Residual Dividend Policy", a company should A. establish a "dollar based dividend", then supplement it each year with one-time payments only if money is available from "Residual Retained Earnings" to do so B. retain an amount of earnings "in residual" to cover already cstablished dividend payments to shareholders and put the remainder of earnings toward capital budget projects with positive NPV's C. increase the dividend payment to shareholders in any given year by an amount equal to the "residual earnings" after all new capital projects have been funded D. establish its optimal capital structure, determine the optimal capital budget within that capital structure, retain the amount of earnings (Retained Earnings) necessary for the equity financing component of the optimal capital structure & budget, and pay out the remainder of earnings as dividends to shareholders 9. Which of the following statements is/are practical difficulties associated with establishing an Optimal Capital Structure and determining the degree of financial leverage? . It's essentially impossible to determine how Price/Earnings Ratio's (P/E) and equity capitalization rates (Ks values) are affected by different degrees of financial leverage B. Management's attitudes toward risk differ. Some managers may set a target/optimal capital structure other than the one that actually maximizes the stock price (so as to, maybe, increase EPS...and maximize their compensation) Management has a responsibility to provide continuous service, growth, and stability; it must preserve the long-term viability of the company. Thus, the objective of using leverage to maximize short-term stock price and minimize capital costs may conflict with long-term viability. C. D. Both statements B& C are correct. 10. Ifa company went from "zero debt (no debt, Debt Ratio = 0) through successively higher levels of debt (Debt Ratio progressively increases) over time, why would you expect its stock price to initially increase, then hit a peak, then begin to decrease? A. As the company uses more debt financing, its income will initially increase, thus increasing stock price, but then decline as more debt is used and the added interest expenses become non-tax deductible. B. The company's stock price will initially increase since Net Income, EPS, and ROE ("return") will increase due to the tax deductibility of interest expense. However, stock price will peak, and then decrease as the "risk" associated with additional debt will "outweigh" the benefits of interest's tax deductibility and financial leverage. C. Initially, the Cost of Debt (Kd) will be less than the Cost of Equity/Required Rate of Return (Ks) As more debt financing is used, Kd will increase above Ks. As Ks decreases, relative to Kd, the stock price will decrease D. As the company uses more debt financing, it will not use as much equity financing. As such, Return On Equity (ROE) will increase. ROE is the primary determinant of stock price 11. There are many factors to consider when establishing Dividend Policy & Payout Ratio. Which of the following factors is least important? A. Investors' preference for dividend income vs. capital gains, or visa-versa...the "clientele effect B. "Signaling" to the investment community via implied "asymmetric information" by management. C. Whether or not competing companies in the same industry pay dividends... if they are, we should too. D. The company's optimal target capital structure (debt/equity ratio)

Explanation / Answer

7. A

Capital intensive companies ar mostly likely to rely on debt financing as they need more working capital.

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