Midterm MC questions Flashcards
the main difference between short term and long term finance is
the timing of short-term cashflow being within a year or less
the definition of cash in terms of other balance sheet items is
long term debt plus equity minus net working capital(excluding cash) minus fixed assets
if the average accounts receivable that a firm holds decreases without any decrease in credit sales, the operating cycle will:
decreases because days sales outstanding decreases
if the use of supplier financing decreases and is replaced by cash financing for the same level of business activity, the cash cycle will
increase because days in payables decrease
when analyzing the decision to change the cash discount policy, the firm should:
chose the policy with the highest NPV
the net credit period for a company with terms of 3/10 net 60 is
50 days
the use of WACC to select investments is theoretically acceptable when:
the systematic risk of the projects are equal to the systematic risk of the firm
In an EPS-EBI graphical relationship, the slope of the debt ray is steeper than the equity ray. The debt ray has a lower intercept because
a fixed interest charge must be paid even at low earnings
a firm has zero debt in its capital structure. re. Its overall cost of capital is 10%. The firm is considering a new capital structure with 60% debt. The interest rate on the debt would be8%. Assuming there are no taxes or other imperfections, its cost of equity capital with the new capital structure would be:
13%
the increase in risk to equity-holders when financial leverage is introduced is evidenced by:
a higher variability of EPS with debt than all equity
A key assumption of MMs Proposition I (no taxes) is:
that individuals must be able to borrow on their own account at rates equal to the firm
In a world of no corporate taxes if the use of leverage does not change the value of the levered firm relative to the unlevered firm this is known as:
MM Proposition I that the market value of the firm is invariant to the capital structure
- A firm has a debt-to-equity ratio of 1. Its cost of equity is 16%, and its cost of debt is 8%. If there are no taxes or other imperfections, what would be its cost of equity if the debt-to-equity ratio were 0?
12%
MM Proposition I with corporate taxes states that:
A)capital structure can affect firm value.
B)by raising the debt-to-equity ratio, the firm can lower its taxes and thereby increase its total value.
C)firm value is maximized at an all debt capital structure
the change in firm value in the presence of corporate taxes is:
positive as equity-holders gain the tax shield on the debt interest
