True/False Exam 2
In order to properly evaluate a stock, investors need only consider its risk.,
False
Just like stocks the market value of bonds at maturity is equal to their par value.
False
Replacing equity financing with debt financing always leads to higher EPS.
False
The balance sheet identity indicates that total liabilities can be found by adding total assets to total equity.
False
The only variable on the right-hand side of the CAPM formula that varies from one company to another is expected return on the market.
False
The optimal capital structure maximizes a firm's WACC.
False
The unlimited liability feature of equities means that investors cannot lose money on stocks.
False
Unlike investors in bonds, investors in stocks do not have the opportunity to realize regularly recurring income.
False
The best measure to use when comparing alternative investments is the amount of the dollar gain or loss.
False; Better to use corresponding Risk & Return
Based on the period 1950 - 1999, you would have the less uncertainty about any expected return on small company stocks than you would about the expected return on large company stocks.
False; Due to recessions many stocks were underperforming irrespective of size of company
Changes in interest expense do not affect a firm's cash position.
False
Financial leverage can magnify gains but not losses.
False
If a firm's CFFA or "free cash flow" is negative, this means that the firm will be unable to pay any cash dividends.
False
If there is no change in gross fixed assets from one year to the next, then net fixed assets would have to have increased.
False
COGS appears on the asset side of the BS.
False
Calculation of retained earnings is one of the factors cited by our author for why NI and CF may be different.
False
Ceteris paribus, lower standard deviations represent greater risk.
False
"Diversifiable" risk, "Company-specific" risk, "Unsystematic" risk and "Market" risk all refer to the same type of risk.
False
A stock with one-half the average market risk would have a value for beta of 2.0.
False
A way to measure the advantage of financial leverage to owners is to examine EPS before borrowing additional funds
False
An increase in accounts receivable constitutes a use of cash while a decrease in accounts payable constitutes a source of cash.
False
Accounts payable represents short-term loans extended to the corporation by suppliers.
True
An increase in inventory constitutes a use of cash.
True
By diversifying you can eliminate most or all of unsystematic risk.
True
Ceteris paribus, an increase in accounts receivable would reduce CFFA
True
Ceteris paribus, riskier firms will have higher WACCs.
True
Ceteris paribus, debt is a cheaper source of funds for a corporation.
True
If CFFA is 100, CFTC is 60 and dividends paid is 20, then the firm repurchased stock in the amount of 20.
True
If a firm borrows at 6% and earns 8% on the borrowed funds, then adding debt would benefit shareholders.
True
Ignoring any "Other" operating income or operating expenses, EBIT can be found by subtracting SGA and Depreciation from the gross profit.
True
Investors should always choose stocks with the highest reward-risk ratio.
True
Our author discusses the average return and standard deviation for 4 different assets for the period 1950 - 1999.
True
Shareholders would benefit from the use of debt whenever EBIT is above the Break-Even EBIT.
True
Stocks typically have no finite maturities but bonds do.
True
The lower the correlation coefficient between two stocks, the greater will be the benefit from diversifying by combining the two stocks in a portfolio.
True
The lower the degree of financial leverage, the lower the volatility in EPS.
True
The standard deviation is the square root of the variance
True
When a corporation liquidates it assets, stockholders get paid after bondholders.
True
With holding periods of more than a year, annualizing the HPR makes it smaller.
True
