Optimal capital structure is the capital structure at which the weighted average cost of capital is minimized, thereby maximizing a firm’s value. Indicate whether the statement is true or false ANSWER TRUE
Date: September 19th, 2020
In an event study, what two steps does a researcher take to adjust for the valuation effects of other new (and simultaneously-revealed) value-relevant information, in order to isolate the valuation effect of a specific event? a. (i) using the market model to remove the effects of other firm-specific factors; and (ii) averaging abnormal returns across […]
Date: September 19th, 2020
Management has just discovered an excellent investment for which it needs additional funding. Relative to the discussion on asymmetric information, the firm should ________. A) finance with new common stock if management believes the firm is undervalued B) finance with debt if management believes the firm is undervalued C) finance with debt if management believes […]
Date: September 19th, 2020
Nonmanufacturing firms are more likely to have positive cash conversion cycles; they generally carry smaller, faster-moving inventories and often sell their products for cash. Indicate whether the statement is true or false ANSWER FALSE
Date: September 19th, 2020
Richard works for a firm that is expanding into a completely new line of business. He has been asked to determine an appropriate WACC for an average-risk project in the expansion division. Richard finds two publicly traded stand-alone firms that produce the same products as his new division. The average of the two firms’ betas […]
Date: September 19th, 2020
Fortunately for investors, assigning a beta to individual projects is more of a science than an art. Indicate whether the statement is true or false. ANSWER Answer: FALSE Explanation: Assigning a beta to individual projects is more of an art than a science.
Date: September 19th, 2020
In the _(i)_ of the efficient market hypothesis (EMH), a security’s price reflects all publicly available information. In the __(ii)_ form of the EMH, a security’s price reflects all information that may be contained in the historical prices of a security. In the _(iii)_ of the EMH, a security’s price reflects all information, whether it […]
Date: September 19th, 2020
Acme Business Connections (ABC) has an adjusted WACC of 8.56%. The company has a capital structure consisting of 60% equity and 40% debt, a cost of equity of 11.00%, a before-tax cost of debt of 7.00%, and a tax rate of 30%. ABC is considering expanding by building a new shop in a distant city […]
Date: September 19th, 2020
Penney Fashions is adding a new line of shoes to the company portfolio and has the following information: the expected market return is 13%, the risk-free rate is 3%, and the expected return on the new project is 11%. What is the beta of the project? A) 0.60 B) 0.70 C) 0.80 D) 0.90 […]
Date: September 19th, 2020
For firm XYZ in the previous problem, suppose the firm’s business risk is defined in terms of (ROA), and (ROA)=19%. Assuming that the debt is default-free, compute (ROE). (ROE) a. 19.000% b. 24.325% c. 30.875% d. 49.400% FORMULA: (ROE)= (ROA)[TA/BEQ] ANSWER C
Date: September 19th, 2020
