(13) Working capital includes all of the following items except: Notes payables.

Question

(13) Working capital includes all of the following items except:

Notes payables.

Inventory.

Retained earnings.

Account payables.

(14) Which of the following statements about Capital Asset Pricing Model (CAPM) equation "E(RA) = Rf +BA(E(RM) - Rf) " is true ______

E(RA) is the required rate of return for stock A.

Rf is the real risk-free rate.

E(RM) is the required rate of return on the individual security.

BA is the beta coefficient for the market portfolio.

(16) A firm's optimal capital structure ______

is generally a mix of 40% debt and 60% equity.

exists when the debt-equity ratio is 0.5.

is the debt-equity ratio that exists at the point where the firm's weighted after-tax cost of debt is minimized.

is the debt-equity ratio that results in the lowest possible weighted average cost of capital and the largest firm value

(18) Business risk is defined as the:______

equity risk that comes from the nature of a firm's operating activities.

equity risk associated with the capital structure of a firm.

probability that a firm will file bankruptcy.

situation in which a firm causes its creditors to suffer a financial loss.

(21) Announcements and news contain both an expected component and a surprise component. It is the surprise component that affects a stock's price and therefore its return____

True

False

(23) We want to choose the optimal capital structure for a firm that will maximize the stockholder wealth _______

True

False

(25) A company can buy back its own shares of stock (stock repurchase) on the open market, and the company can also make a tender offer to buy back its shares. _______

True

False

(26) Which one of the following is the prime objective of a residual dividend policy? _______

Maintaining a stable dividend

Increasing the dividend at a steady pace

Meeting the firm's investment needs

Maintaining a stable dividend payout ratio

(30) In a Chapter 7 bankruptcy, which one of the following will have the lowest priority when a bankrupt firm's assets are distributed if the absolute priority rule is followed?

preferred stockholders

secured creditors

unsecured creditors

common shareholders

(36) Suppose we have a bond issue currently outstanding that has 25 years left to maturity. The coupon rate is 9% and coupons are paid annually. The bond is currently selling for $968.72 per $1,000 bond. What is the before-tax cost of debt (YTM)?

5.00%

9.33%

10.0%

9.00%

(37) Based on the information from Question 36, if the firm's marginal tax rate is 20%. What's the firm's after-tax cost of debt?________

3.58%

5.08%

6.32%

7.46%

(39) If a firm's before-tax cost of common equity is 6.5% and the firm has a 20% marginal tax rate, what is the firm's after-tax cost of preferred stock?

6.5%

5.2%

10.0%

None of above is correct.

(43) A firm has a $10 million bond outstanding with a coupon rate of 6%. The tax rate is 35%. What is the present value of the tax shield?______

$3.5 million

0.18 million

$10 million

$13.5 million

Notes payables.

Inventory.

Retained earnings.

Account payables.

Explanation / Answer

13) Working Capital does not include retained Earnings. Working Capital is the difference between Current assets and Current Liabilities Current Assets includes: Cash and Cash equivalents Accounts receivale Inventory Prepaid Expenses Current Liabilities includes: Accounts Payable Notes Payable Shorts term borrowings 14) Rf is the real risk free rate---True R(M) defines market risk premium R(A) defines required rate of return B defines beta of portfolio 16) A firm's optimum capital structure is the debt -equity ratio that results in the lowest possible weighted average cost of capital and largest firm value. Capital structure is the combination of debt and equity.Decision about firm's debt -equity ratio are called as capital structure decision. 18) Business risk is defined as equity risk that comes from the natue of a firm's operating activities. Equity risk associated with the capital structure is known as financial risk. Probability that a firm will file bankruptcy describes the firm insolvency position. Situation in which a firm causes its creditors to suffer a financial loss is known as financial distress. 21) Announcement and news contain both an expected component and a surprise component.It is the surprise component that affects a stock price and therefore its return this is because stock price move when an unexpected announcement is made or earnings are different than anticipated.(True) 22) We want to choose an optimum captial structure for a firm that will maximise the stockholder's wealth.(True) Primary purpose of financial mangement is to maximise shareholder's wealth so that capital structure which will maximise shareholders wealth will be chosen.

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