F125 Final Vocab

When evaluating any capital project proposal, the cost of capital:

Depends upon how the funds raised for that project are going to be spent

According to _____, the value of a company is unrelated to its capital structure.

M&M Proposition 1, no tax

Which one of the following q's involves a captital budgeting decision?

Should the firm purchase a new machine for the production line?

When reviewing a graph of data from sensitivity analysis, the ____________ the line, the ____________ the sensitivity of the estimated Net Present Value.

Steeper, greater

According to M&M proposition 2 without taxes, which is true?

The required return on assets is equal to the weighted avg cost of capital

To determine a firms cost of capital, one must include

The returns currently required by both debt holders and stockholders

What's the main advantage of using the dividend growth model to est. a firms cost of equity?

The simplicity of the model

True or False: If a substantial percentage of the scenarios look bad, the degree of forecasting risk is high and further investigation is in order.

True

What is M&M proposition 2 without taxes?

a company's cost of equity is a linear function with a slope equal to (Ra-Rd)

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, while all else is constant, what action will decrease the firms cost of equity?

a decrease in the firms beta

The symbol Ru refers to the cost of capital for a _____ while Ra represents the _____

all-equity company; weighted avg cost of capital

What best illustrates that the management of a firm is adhering to the goal of financial management?

an increase in the market value per share

When calc a firm's weighted average cost of capital, the capital structure weights:

are based on the market values of the outstanding securities

When using the subjective approach to project analysis, a firm:

assigns discount rates to projects based on the direction of the senior managers of a firm

Relationship between a levered and unlevered capital structure.. ignore taxes

at the break even point there is no advantage to debt

Deciding which long term investment a firm should make is a ___ decision

capital budgeting

A firm's mixture of debt and equity financing is the result of its ___ decisions

capital structure

a firm's aftertax cost of debt will increase if there is a ____

decrease in the company's tax rate

Explicit costs, such as legal and administrative expenses, associated with CORPORATE DEFAULT are classified as ____ costs

direct bankruptcy

Assume a firm has a debt-equity ratio of .48 The firms cost of equity is

directly related to the risk level of the firm

Assume a firm utilizes its WACC as the discount rate for every capital project it implements.. the firm will

increase the avg risk level of the company over time

According to the pecking-order theory, firms prefer to use ____ before any other form of financing.

internal funds

Homemade leverage is employed when a ____

investor uses debt to change his or her exposure to financial leverage

Accurate statement about a firm's pretax cost of debt

it is based on the current yield to maturity of the company's outstanding bonds

Accurate statement about the dividend growth model

it is only as reliable as the est. rate of growth

accurate statement about the weighted average cost of capital

it is the return investors require on the total assets of the firm

A company that has a ____ would be most likely to have a high percentage of debt in its optimal capital structure

low probability of financial distress

the sarbanes-oxley act of 2002 is a gov response to

management greed and abuse

which one of the following best states the primary goal of financial management?

maximize the current value per share

A manager determines cost of capital for a project based on the cost of capital at another firm with a similar project.. the manager is using the __ approach.

pure play

the cost of preferred stock is equivalent to the

rate of return on a perpetuity

Financial managers should primarily focus on the interests of

shareholders

In a typical corporate organizational structure

the controller reports to the CFO

A graph has earnings per share on the vertical axis and EBIT on the horizontal axis.. the steeper the slope ___

the greater the sensitivity of EPS is to changes in EBIT

M&M Proposition 1 with taxes is based on the concept that

the value of a taxable company increases as the level of debt increases

Liquidity under chapter 7 bankruptcy:

under chapter 7 bankruptcy a trustee will assume control of the company's assets until those assets can be liquidated

In general, the capital structure of US firms:

vary significantly across industries

The value of the firm is maximized when

weighted avg cost of capital is minimized

When evaluations of the timing of a projects projected CF's, what is a financial manager analyzing?

when each CF is expected to occur

The optimal capital structure

will vary over time as taxes and market conditions change