A firm’s provides valuable services in terms of ensuring that: (i) all parties involved in a project are working on coordinated and timely bases; (ii) original plans and specifications are followed, or alternatively that necessary changes are approved by senior management; (iii) effective product quality and cost controls are instituted at every stage of the […]
The adjusted WACC is the correct discount rate to use when evaluating a firm’s average-risk projects. Indicate whether the statement is true or false. ANSWER Answer: TRUE
When estimating a weighted average cost of capital, a firm can use either book values or market values for estimating the value of the component sources of capital. Where would you find book values, and what value do they represent? How would you calculate market values? In general, would you prefer to use market or […]
Using the WACC to evaluate all projects has the effect of making low-risk projects look MORE attractive and high-risk projects look LESS attractive. Indicate whether the statement is true or false. ANSWER Answer: FALSE Explanation: Using the WACC to evaluate all projects has the effect of making low-risk projects look LESS attractive and […]
A negative cash conversion cycle (CCC) means the average payment period (APP) exceeds the operating cycle (OC). Indicate whether the statement is true or false ANSWER TRUE
Operating and financial constraints placed on a corporation by loan provision are ________. A) agency costs to lenders B) agency costs to a firm C) necessary to regulate ownership of a firm D) necessary to control the risk of a firm ANSWER B
Your firm has an average-risk project under consideration. You choose to fund the project in the same manner as the firm’s existing capital structure. If the cost of debt is 9.00%, the cost of preferred stock is 12.00%, the cost of common stock is 16.00%, and the WACC adjusted for taxes is 14.00%, what is […]
Equity is an attractive form of financing for a firm because it has additional tax advantages for the firm compared to debt. Indicate whether the statement is true or false. ANSWER Answer: FALSE Explanation: DEBT is an attractive form of financing for a firm because it has additional tax advantages for the firm […]
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
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 […]
