Final Exam Flashcards
In cash flow estimation, the existence of externalities should be taken into account if those externalities have any effects on the firm’s long-run cash flows.
True or False?
True
A firm that bases its capital budgeting decisions on either NPV or IRR will be more likely to accept a given project if it uses accelerated depreciation than if it uses straight-line depreciation, other things being equal.
True or False?
True
Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?
A. Common stock raised by new issues.
B. Long-term debt.
C. Accounts payable.
D. Preferred stock.
E. Common stock “raised” by reinvesting earnings.
Accounts Payable
Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?
Hint: In equilibrium total required return = dividend yield + growth rate
A. The two stocks must have the same dividend per share.
B. The two stocks must have the same dividend growth rate.
C. The two stocks must have the same dividend yield.
D. If one stock has a higher dividend yield, it must also have a higher dividend growth rate.
E. If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
You, in analyzing a stock, find that its expected return exceeds its required return. This suggests that you think management is probably not trying to maximize the price per share.
A. the stock is experiencing supernormal growth.
B. the stock should be sold.
C. dividends are not likely to be declared.
D. the stock is a good buy.
the stock is a good buy.
If the intrinsic value of a company’s stock is less than the market price, which of the following is the best course of action?
A. The company should buyback their shares as they are undervalued
B. The company should issue their shares to raise capital as they are undervalued
C. The company should buyback their shares as they are overvalued
D. The company should issue their shares to raise capital as they are overvalued
The company should issue their shares to raise capital as they are overvalued
Stephenson Co.’s 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?
A. If the yield to maturity stays constant until the bond matures, the bond’s price will remain at $850.
B. The bond is currently valued at a premium
C. The bond’s yield to maturity is greater than its coupon rate.
D. The bond’s current yield is equal to its coupon rate.
E. The bond’s coupon rate exceeds its current yield.
The bond’s yield to maturity is greater than its coupon rate.
Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?
A. The company would have to pay less taxes.
B. The company’s net income would increase.
C. The company would have less common equity than before.
D. The company’s taxable income would fall.
The company’s net income would increase.
Other things held constant, which of the following actions would increase the amount of cash on a company’s balance sheet?
A. The company pays a dividend.
B. The company issues new common stock.
C. The company gives customers more time to pay their bills.
D. The company purchases a new piece of equipment.
E. The company repurchases common stock.
The company issues new common stock.
Which of the following statements is CORRECT?
A. A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
B. Common equity includes common stock and retained earnings, less accumulated depreciation.
C. The retained earnings account as shown on the balance sheet shows the amount of cash that is available for paying dividends.
D. If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.
A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
Which of the following statements is CORRECT?
A. If a firm reports positive net income, its EVA must also be positive.
B. One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.
C. One way to increase EVA is to achieve the same level of operating income but with more investor-supplied capital.
D. One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital.
One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital.
Which of the following is true regarding risk and diversification?
A. A Beta measurement of 1.1 is slightly below average
B. Investments with partial correlation can be combined to reduce risk
C. Company specific risk cannot be diversified away
D. Systematic risk can be diversified away
Investments with partial correlation can be combined to reduce risk
Which of the following would theoretically have a positive impact on the intrinsic value of a company’s stock, assuming you value it using a dividend discount model?
A. Lower dividends
B. Higher interest rates
C. Lower risk as measured by the company’s beta
D. None of the above
Lower risk as measured by the company’s beta
TRUE OR FALSE?
1) To mitigate agency costs, corporations will tie compensation to the stock price using vested stock options
2) If a company’s stock is undervalued they should issue shares
A. Both are true
B. Both are false
C. 1 is true and 2 is false
D. 2 is true and 1 is false
1 is true and 2 is false
A 10-year bond that was issued at par with a face value of $1,000 currently sells for $900. Which of the following statements is CORRECT? Recall that YTM = Current Yield + Capital Gains Yield; Note: you do not need to know the coupon rate to solve this problem.
A. The bond’s yield to maturity exceeds its coupon rate
B. The bond’s coupon rate is equal to its yield to maturity
C. The bond’s price is currently at a premium
D. The bond’s capital gains yield is negative.
The bond’s yield to maturity exceeds its coupon rate
