FINA 4300 Test 3 defenitions

Taxable income is reduced by the amount of the interest on a firm's debt.

the following statements regarding interest tax shields is correct?

increase the variability in earnings per share.

Under the simplifying assumptions of Modigliani and Miller, an increase in a firm's financial leverage will:

ABC's cash flows from operations are less volatile than XYZ's

When considering the impact of distress costs on capital structure, which of the following facts should lead ABC Corporation to set a higher target debt ratio than XYZ Corporation (all else equal)?

III. The accounting earnings from a cash flow.

When making a capital budgeting decision, which of the following is/are NOT relevant?

Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall

According to the pecking order theory of capital structure, why do firms avoid issuing equity?

I. For financing needs, firms prefer to first tap internal sources such as retained profits and excess cash. II. There is an inverse relationship between a firm's profit level and its debt level. IV. A firm's capital structure is dictated by its need for external financing.

According to the pecking order theory proposed by Stewart Myers of MIT, which of the following are correct?

II. increases breakeven sales, like operating leverage, but increases the rate of earnings per share growth once breakeven is achieved. III. is a fundamental financial variable affecting sustainable growth. IV. increases expected return and risk to owners.

Financial leverage:

the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage.

Homemade leverage is:

vary significantly across industries.

In general, the capital structures used by non-financial U.S. firms:

Borrow funds rather than limit growth, thereby limiting growth only as a last resort.

NOT a likely financing policy for a rapidly growing business?

Which of the following is NOT an implication of the pecking order theory of capital structure?

NOT an implication of the pecking order theory of capital structure?

II. exclude interest expense. III. include the depreciation tax shield related to the project.

Pro forma free cash flows for a proposed project should:

the total cash flow of the firm

The basic lesson of the M&M theory is that the value of a firm is dependent upon:

maximizes expected cash flows.

The best financing choice is the one that:

I. no taxable income. III. zero debt. IV. no leverage

The interest tax shield has no value when a firm has:

I. Direct bankruptcy costs II. Indirect bankruptcy costs III. Direct costs related to being financially distressed, but not bankrupt IV. Indirect costs related to being financially distressed, but not bankrupt

The term "financial distress costs" includes which of the following?

I. Market signaling III. Tax benefits

Which of the following factors favor the issuance of debt in the financing decision?

II. Distress costs IV. Financial flexibility

Which of the following factors favor the issuance of equity in the financing decision?

I. Payback period IV. Accounting rate of return

Which of the following figures of merit does not directly take into consideration the time value of money?

I. Payback period

Which of the following figures of merit might not use all possible cash flows in its calculations?

The value of a dollar in the future will be compounded more than the value of a dollar today.

Which of the following is NOT a reason why a dollar today is worth more than a dollar in the future?

Estimate the accounting rate of return for the investment

Which of the following is NOT an important step in the financial evaluation of an investment opportunity?

I. Estimated pro forma coverage ratios III. A range of earnings chart and proximity of expected EBIT to the breakeven value

Which of the following is/are helpful for evaluating the effect of leverage on a company's risk and potential returns?

II. Capital expenditures for equipment to produce the new product III. Increase in working capital needed to finance sales of the new product

Which of the following should be included in the cash flow projections for a new product?

I. The IRR is the discount rate at which an investment's NPV equals zero. III. The IRR tends to be used more than net present value simply because its results are easier to comprehend.

Which of the following statements related to the internal rate of return (IRR) are correct?

A. Lack of interest tax shields

Which of the following would not be considered a cost of financial distress?