Debt Policy 3 Flashcards
True or False: According to Modigliani and Miller Proposition II, since the expected rate of return on debt is less than the expected rate of return on equity, the weighted average cost of capital declines as more debt is issued.
FALSE
True or False: According to Modigliani and Miller Proposition II, the firm’s expected return on assets depends on several factors including the firm’s capital structure.
F
True or False: Financial leverage increases the expected return and risk of the shareholder.
T
True or False: Modigliani and Miller’s Proposition I states that the market value of any firm is independent of its capital structure
T
True or False: Modigliani and Miller Proposition II states that the rate of return required by shareholders increases steadily as the firm’s debt-equity ratio increases.
T
True or False: The firm’s asset beta is usually higher than the firm’s equity beta.
F
True or False: The principle of value additivity holds for the aggregation of assets but does not apply to the division of assets.
F
According to the graph of WACC for Union Pacific, which of the following is (are) true?
I) The cost of equity is an increasing function of the debt-equity ratio.
II) The cost of debt is an increasing function of the debt-equity ratio.
III) The weighted average cost of capital (WACC) is a decreasing function of the debt-equity ratio.
I, II
Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk? A. expected risk formula B. time value of money equation C. capital asset pricing model D. unsystematic risk equation E. market performance equation
The capital asset pricing model
Which two methods of project analysis are the most biased towards short-term projects?
A. discounted payback and profitability index
B. payback and discounted payback
C. net present value and internal rate of return
D. net present value and discounted payback
E. internal rate of return and profitability index
Payback and discounted payback
An analysis of the change in a project’s NPV when a single variable is changed is called _____ analysis.
Sensitivity
Which one of the following measures the amount of systematic risk present in a particularly risky asset relative to the systematic risk present in an average risky asset
Beta
Par value or face value of a bond
It is a static value determined at the time of issuance and, unlike market value, it doesn’t fluctuate.
There are a number of factors by which a company sets a par value for each common stock share offered.
- Initial capitalization target
- Number of public shares to be offered, as well as the ownership position of the initial owners
- Prediction of share price changes after shares are offered in the market
Yield to Maturity (YTM)
Otherwise referred to as redemption or book yield – is the speculative rate of return or interest rate of fixed-rate security, such as a bond.
YTM is typically expressed as an annual percentage rate (APR). It is determined through the use of the following formula:
C + FV - PV/t / FV + PV / 2 C – Interest/coupon payment FV – Face value of the security PV – Present value/price of the security t – How many years does it take the security to reach maturity