Day 41 Flashcards
Equation: Expected Rate of Return
= Annual Div / Current Mkt Price
MCQ-05180
Equation: After Tax Cost of Debt
= Pre-Tax Cost of Debt × (1 - Tax Rate)
= Basis Point over US Treasury Bond × (1/100) + Current Risk Free Rate × (1 - Tax Rate)
MCQ-03951
A company with high operating leverage:
Will have greater risk and greater potential return
Note: A company with high operating leverage (high fixed costs) has the risk of covering costs regardless of sales
A small change in sales will have a larger impact on profits, once all fixed costs are covered, additional contribution margin will go straight to operating income
MCQ-07773
True or False: Preferred Stock dividends are tax deductible
False
MCQ-03942
Firms with a higher degree of financial leverage will experience:
Once fixed interest costs are covered, additional EBIT will go straight to net Income
MCQ-07809
Equation: Cost of Equity
= (Div / Current Share Price) + Growth Rate
MCQ-07104
If tax rates are expected to decrease, the WACC will:
Increase, bc the After-Tax Cost of Debt will Increase
MCQ-07791
Define: Translation Risk
The risk that assets, liabilities, equity, or income of a consolidated organization that includes foreign subsidiaries will change as a result of changes in exchange rate
Foreign Subs
MCQ-03738
A country that engages in both importing and exporting will be exposed to transaction exposure due to exchange rates. What is the biggest risk?
Payables dominated in foreign currency when domestic currency falls
Payable will have to be paid in foreign currency while it appreciates and domestic currency depreciates
MCQ-07848
Equation: Effective Interest Rate
= Interest paid “per period” / Net Proceeds of Loan
MCQ-05788
Equation: Cost of RE
= Risk Free Rate + Risk Premium
= Risk Free Rate + (Beta × Market Premium)
= Risk Free Rate + [Beta × (Market Return - Risk Free Rate)]
MCQ-07806
