7. The risk reduction. correlated the returns from two securities are, the a. mo

Question

7. The risk reduction. correlated the returns from two securities are, the a. more positively, greater b. greater, greater c. less positively, greater d. lower, lower _ will be the portfolio effects of 8. Which of the following is not an advantage of common stock financing? a. no fixed dividend obligation b. can lower the firm's weighted cost of capital c. allows the firm a greater de d. involves relatively high flotation costs 9. Which of the following is not a characteristic of long-term debt? a. interest paid to bond holders is a tax-deductible expense to the firm b. firm is not legally required to pay interest to bond-holders c. usually has a specific maturity d. all of the above are characteristics of long-term debt 10. When the required rate of return is the coupon rate, the bond will sell at a discount. a. less than b. greater than c. the same as d. equal to 11. In 1998, Hepler Company's sales were $26 million and its total assets were $10 million. Current liabilities were $4 million and total equity was $2 million. Hepler Company's sales for 1999 are forecasted to be $34 million, earnings after taxes are expected to be 5 percent of sales and dividends of $800,000 are expected to be paid. Assuming that the ratios "assets to sales" and "current liabilities to sales" in 1998 remain the same in 1999, determine the amount of additional financing required. a. $1,746,154 b. $1,446,154 e. $6,946,154 d. $ 946,154 12. Scorch &e; Burn Fire Extinguishers, Inc. had an operating income (EBIT) of $260.000 last year. The firm had $18,000 in depreciation expenses, $15.000 in interest expenses and $60,000 in selling, general, and administrative expenses. If Scorch & Burn has a marginal tax rate of 40%. what was its after-tax cash flow for last year? $165,000 $129,000 $174,000 $147,000

Explanation / Answer

7) Lesser the correlation from -1 to +1, more positive effect of diversification and vice versa
a) more positive will lead to lesser risk reduction
b)Greater will lead to lesser risk reduction
c) Is the correct option
d)lower will lead to higher risk reduction

8) a is the advantage as common stock need not pay dividend
b) Lowering of WACC is advantage
c)Common stock will not have any capital strucure requirements that need be met
d is the correct option as it is a disadvantage

9) a) Interest provides tax shield
b) this is not true as the firm is obligated to pay interest hence b is applicable option
c)Usually it does have specific maturity
d) is not applcable because b is not true

10) When required return is more than the coupon rate bond will sell at a discount
Hence b is the applicable answer

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