The risk of the debt capital is less than that of other long-term contributors of capital because ________. A) they have a lower priority of claim against any earnings or assets available for payment B) they have the stockholders’ personal assurance for all future interest payments C) there is no interest rate risk as the […]
Under which of the following circumstances is the pure play method of estimating a project’s beta particularly useful? A) The firm is looking to expand its current business operations, doing essentially the same work. B) The firm is looking to expand its current business operations into a brand new area unlike any of its internal […]
Empirical studies have found that, across firms, Tobin’s Q ratio initially increases with managerial ownership fraction, but beyond a critical level, the ratio decreases with further increases in managerial ownership. One argument for why this ratio decreases at higher managerial ownership levels is that: a. board directors no longer believe that they need to monitor […]
Lang, Ofek, and Stulz (1996) analyzed the relationship between leverage and growth opportunities. They focus on the market’s assessment of the ability of the firm to generate profitable growth. Their measure of profitable growth opportunities is Tobin’s q ratio, the ratio of the market value of the firm’s equity to its book value. They summarize […]
The ability to purchase production inputs on credit allows a firm to partially offset the length of time resources are tied up in the operating cycle. Indicate whether the statement is true or false ANSWER TRUE
If all projects are assigned the same discount rate for purposes of evaluation, which of the following could occur? A) Low-risk projects could be rejected when in fact they are good investment choices. B) High-risk projects could be accepted when in fact they are poor investment choices. C) High-risk projects could be accepted when in […]
Takelmer Industries has a different WACC for each of three types of projects. Low-risk projects have a WACC of 8.00%, average-risk projects a WACC of 10.00%, and high-risk projects a WACC of 12%. Which of the following projects do you recommend the firm accept? Project Level of Risk IRR A Low 9.50% B Average 8.50% […]
It is necessary to assign the appropriate cost of capital for each individual project that reflects that project’s ________ when doing capital budgeting. A) life B) cash flows C) riskiness D) managers ANSWER Answer: C
The conflict resulting from a manager’s desire to increase a firm’s risk without increasing current borrowing costs and lenders’ desire to limit lending is one effect of the ________ problem. A) agency B) leverage C) capital D) variable cost ANSWER A
At the end of year 1 firm XYZ has TA=$325 bn., and it is financed with debt with a book value of $125 mn. and equity with a book value of $200 mn. The firm must pay 10% interest annually on its debt. In year 2, the firm had a net income of $55 mn. […]
