Fin-Quiz #4

Which one of these best describes the relationship between bondholders and stockholders at a time when it appears the firm may be facing increased financial distress? Choose the most likley answer.

a. Both parties tend to work together for the common good of the firm. Both bondholders and stockholders will encourage the firm to take on new high risk projects. b. Bondholders will tend to lower their required rate of interest as the risk has gone down and the firm can afford additional financing until its financial status improves. c. Bondholders tend to milk the property at the expense of stockholders. d. Both parties tend to work together towards the liquidation of the firm. e. Stockholders have an incentive to underinvest in new projects to the detriment of bondholders Answer: e. Stockholders have an incentive to underinvest in new projects to the detriment of bondholders

Which one of these statements is correct?

a. Long-term debt is the residual difference between assets and liabilities. b.Net income that is not paid out in dividends decreases retained earnings. c. Long-term debt requires a payout of cash within a stated time period. d. Stockholders' equity increases as the liquidity of a firm increases. e. Stockholders' equity is stated at market value on the balance sheet. f. Long-term debt is the sum of the assets and liabilities. Answer: c. Long-term debt requires a payout of cash within a stated time period.

Which one of the following actions by a financial manager least meets the goal of financial management?

a. Refusing to lower selling prices if doing so will reduce the net profits b. Increasing current costs in order to increase the market value of the stockholders' equity c. Agreeing to expand the company at the expense of stockholders' value d. Agreeing to pay bonuses based on the market value of the company stock e.Refusing to borrow money when doing so will create losses for the firm f. Taking on positive Net Present Value (NPV) projects. Answer: c. Agreeing to expand the company at the expense of stockholders' value

Agency costs refers to (answer based on class discussion):

a. corporate income subject to double taxation b. the total dividends paid to stockholders over the lifetime of a firm. c. the costs that result from default and bankruptcy of a firm d. the total interest paid to creditors over the lifetime of the firm e. the costs that result from taking approvals from different agencies Answer: c. the costs that result from default and bankruptcy of a firm

Capital structure refers to:

a. decisions related to long-term debt and equity financing b. the determination of the ideal mix of current versus long-term assets c. the methods by which fixed assets are used to produce a tangible product d. the mix of current assets and current liabilities e.the acquisition or disposition of a building or other long-term asset f. decisions related to current assets and equity financing Answer: a. decisions related to long-term debt and equity financing

Financial managers should strive to maximize the current value per share of the existing stock because:

a. doing so guarantees the company will grow in sales at the maximum possible rate. b. doing so increases the salaries of all the employees. c. doing so means the firm is growing in dividends faster than its competitors. d. the current stockholders are the owners of the corporation. e. doing so means the firm has higher market share than its competitors. f. the managers often receive shares of stock as part of their compensation. Answer: d. the current stockholders are the owners of the corporation.

The optimal capital structure has been achieved when the:

a. weight of equity is equal to the weight of debt b. debt-to-equity ratio selected results in the lowest possible weighted average cost of capital c. firm is totally financed with debt d. debt-to-equity ratio is such that the cost of debt exceeds the cost of equity e.cost of equity is maximized f. firm is totally financed with equity Answer: b. debt-to-equity ratio selected results in the lowest possible weighted average cost of capital

The value of a firm is maximized when the:

a. weighted average cost of capital is minimized b. weighted average cost of capital is maximized c. when the tax rate is zero d.cost of equity is maximized e.the debt-equity ratio is minimized f. leveraged cost of capital is minimized Answer: a. weighted average cost of capital is minimized

In a world with corporate taxes, MM theory implies that that all firms should:

a.choose an all-equity capital structure b. choose 25%-debt, 75%-equity capital structure c.choose 50%-debt, 50%-equity capital structure d. choose 75%-debt, 25%-equity capital structure e. choose an all-debt capital structure f. select the capital structure that maximizes the firm's WACC Answer: e. choose an all-debt capital structure

The process of planning and managing a firms long-term investments is referred to as:

a.financial deprication b.dividend policy and payout decision c.working capital management d.capital bugeting e.capital structure Answer: Capital Bugeting