Krossaspurningar 2016 Flashcards
1
Q
- Which of the following statements if FALSE?
a) The relationship between the investment term and the interest rate is called the term structure of interest rates.
b) the real interest rate indicate the rate at which your money will grow if invested for a certain period
c) The yield curve is a potential leading indicator of future economic growth
d) The shape of the yield curve will be strongly influenced by interest rate expectations
A
b) the real interest rate indicate the rate at which your money will grow if invested for a certain period
2
Q
- Which of the following statements is CORRECT?
a) In a perfect capital market the value of a firm is not dependent of the risk of its expected cash-flow
b) In a market with imperfections the way that cash-flows are split among debt owners and stock owners may affect the value of the firm’s assets
c) In a perfect capital market the WACC of a levered firm is independent of its capital structure and is equal to the required return on equity
d) In a perfect capital market the required return on equity does not vary with the debt-to-value ratio
A
b) In a market with imperfections the way that cash-flows are split among debt owners and stock owners may affect the value of the firm’s assets
3
Q
- Which of the following statements is CORRECT?
a) Tax at personal investor level may offset the tax advantage of debt at the firm level
b) The majority of stock owners prefer levered firms since the expected return on equity is higher than for unlevered firms
c) When interest payments are tax deductible for a firm, the value of the firm is not equal to the sum of the value of the debt of the value of the equity
d) If corporate tax is the only market imperfection the increase in value of an unleverd firm that takes on debt equals the sum of the future expected tax shields
A
a) Tax at personal investor level may offset the tax advantage of debt at the firm level
4
Q
- If the debt-to-value ratio is 0.20, what is the debt-to-equity ratio?
a) 0.10
b) 0.25
c) 0.33
d) None of the above.
A
b) 0.25
5
Q
- Which of the following statements is CORRECT?
a) Firms with long-term stable cash-flows typically maintain high debt-to value ratios
b) The pecking order hypothesis explains how dividend policy affects firm value
c) When a firm issue equity it signals to the market that its equity is undervalued
d) None of the above
A
a) Firms with long-term stable cash-flows typically maintain high debt-to value ratios
6
Q
- Which of the following statements is CORRECT?
a) When the debt-to-equity ratio varies over time, using the WACC method to value a project is relatively straightforward and is therefore the preferred method with alternative leverage policies
b) When the debt-to-equity ratio is held constant, we can discount interest tax shields using the firm’s cost of debt, rD
c) When a firm maintains a constant debt, we can discount interest tax shields using the firm’s cost of debt, rD
d) None of the above alternatives
A
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7
Q
- Which of the following statements is CORRECT?
a) The relationship between the investment term and the interest rate is called duration.
b) Real interest rates indicate the rate at which your money will grow if invested for a certain
period.
c) An upward sloping yield curve indicates that investors expect future interest rates to be higher.
d) The shape of the yield curve is unrelated to interest rate expectations.
A
ekki b
8
Q
- Which of the following statements is CORRECT?
a) The lower the duration of a bond the higher is the sensitivity to interest rate changes.
b) As interest rates and bond yields fall, bond prices will fall.
c) A zero coupon bond is less sensitive to interest rate changes than a coupon paying bond with the
same maturity.
d) A zero coupon bond with a long maturity is more sensitive to changes in interest rates than a
zero coupon bond with a short maturity.
A
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9
Q
- Which of the following statements is FALSE
a) In a perfect capital market the value of a firm and its weighted average cost of capital depend on
only expected cash‐flows and their risk.
b) In a perfect capital market the way that cash‐flows are split among debt owners and stock
owners affect the value of the firm’s assets.
c) In a perfect capital market a firm’s WACC is independent of its capital structure and is equal to
the equity cost of capital for an unlevered firm.
d) In a perfect capital market the expected return on a firm’s equity is dependent on the firm’s debt
to equity ratio.
A
ekki b
10
Q
- Which of the following statements is CORRECT?
a) The majority of stock owners prefer levered firms since the expected return on equity increases
with leverage.
b) When interest payments are tax deductible for a firm, the value of the firm is affected by its debt
to equity ratio.
c) If corporate tax is the only market imperfection the value of an unlevered firm increases with the
sum of all future expected tax shields when it takes on debt.
d) If corporate tax was the only market imperfection it would be optimal for firms to maintain a 100
percent debt to value ratio.
A
ekki c
11
Q
- Which of the following statements is CORRECT?
a) Although indirect costs of bankruptcy are difficult to measure accurately, they are typically much
larger than the direct costs of bankruptcy.
b) An important effect of bankruptcy is that the equity of the firm becomes worthless.
c) Since stock owners do not have to repay debt in case of bankruptcy it is the bond owners that
bear the full cost of the risk of bankruptcy.
d) Since the risk of bankruptcy is small for the average firm with a low debt to value ratio, increasing
the debt to value ratio moderately, say from 0.15 to 0.30, will have very little effect on the required return on equity if the required return on debt does not change significantly.
A
a) Although indirect costs of bankruptcy are difficult to measure accurately, they are typically much
larger than the direct costs of bankruptcy.
12
Q
- Which of the following statements is FALSE?
a) The agency costs of debt can arise only if there is some chance the firm will default and impose losses on its debt holders.
b) The agency costs of debt only affect bond holders and hence do not affect the firm’s optimal capital structure choice.
c) When a firm faces financial distress, shareholders may reject projects with positive NPV.
d) When a firm faces financial distress, it may benefit shareholders if the firm invests in projects with negative NPV.
A
b) The agency costs of debt only affect bond holders and hence do not affect the firm’s optimal
capital structure choice.
13
Q
- Which of the following statements is FALSE?
a) Firms with high R&D costs and future growth opportunities typically maintain high debt levels.
b) The tradeoff theory explains how firms should choose their capital structures to maximize value
to current shareholders.
c) With tangible assets, the financial distress costs of leverage are likely to be low, as the assets can
be liquidated for close to their full value.
d) Proponents of the management entrenchment theory of capital structure believe that managers
choose a capital structure to avoid the discipline of debt and maintain their own job security.
A
a) Firms with high R&D costs and future growth opportunities typically maintain high debt levels.
14
Q
- Which of the following statements is CORRECT?
a) When we relax the assumption of a constant debt‐equity ratio, the WACC method is relatively
straightforward to use and is therefore the preferred method with alternative leverage policies.
b) When debt levels are set according to a fixed schedule, we can discount the predetermined
interest tax shields using the firm’s opportunity cost of capital, rU.
c) When a firm maintains a constant debt, the value of the interest tax shield is a constant fraction of the firm’s unlevered value.
d) None of the above alternatives.
A
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