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
________ refers to a method of matching a single project of a company to another company with a single business focus in an effort to assign an appropriate level of risk to the project. A) Ghosting B) Pure play C) Outside assignment D) Subjective assignment ANSWER Answer: B
Date: September 19th, 2020
A corporation has $5,000,000 of 10 percent bonds and $3,000,000 of 12 percent preferred stock outstanding. The firm’s financial breakeven (assuming a 40 percent tax rate) is ________. A) $860,000 B) $716,000 C) $1,100,000 D) $1,400,000 ANSWER C
Date: September 19th, 2020
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 […]
Date: September 19th, 2020
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 […]
Date: September 19th, 2020
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
Date: September 19th, 2020
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 […]
Date: September 19th, 2020
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% […]
Date: September 19th, 2020
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
Date: September 19th, 2020
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
Date: September 19th, 2020
