Finance exam 4

to estimate the growth rate of a particular stock, we can

1. use security analysts forecasts 2. use the historical dividend growth rate

What does WACC stand for

Weighted average cost of capital

If a firms has multiple project, each project should be discounting using

a discount rate commensurate with the projects risk

Which of the following involves a firm distributing stock instead of cash to its owners

a stock split a stock dividend

which of the following items are among the items used to compute the current ratio

accounts payable cash

The best way to include flotation costs is to

add them to the initial investment

The discount rate for the firms projects equals the cost of capital for the firm as a whole when

all projects have the same risk as the current firm

Dividends are irrelevant

false

If the firm issues no debt, its average of cost of capital will equal

its cost of equity

The most appropriate weights to use in the WACC are the ___ weights

market value

Which of the following are traditional financial ratio categories

market value ratios profitability ratios assets management ratios

The value of the firm is maximized when the weighted average cost of capital

minimized

A project should only be accepted if its return is above what is

required by investors

The CAPM can be used to estimate the

required return on equity

According to the peaking order theory, what is the preferred source for firms seeking to raise capital

retained earnings

a dividend can be in the firm of cash or

stock

A ___ causes the number of common shares outstanding to increase but leaves total owners equity unchanged

stock split

Which of the following are non marked claims to the firms cash flows

taxes legal fees

When a firm announces to all of its shareholders that it is willing to buy a fixed number of shares at a specific rice, it is referred to as a

tender offer

The EBITDA ratio is similar in spirit to

the PE ratio

The SML approach requires estimates of

the beta coefficient the market risk premium

MM Proposition shows that

the cost of equity rises with leverage

Which of the following methods for calculating the cost of equity ignores risk?

the dividend growth model

WHICH of the following occur with a stock dividend

the number of shares increase no cash leaves the firm the price per share falls

which of the following variables is not required when using the CAPM to compute the cost of equity capital

the rate of inflation

If an analysts forecast for a firms earnings growth is 7 percent, and its dividend yield is 3 percent, its cost of equity will be

10%

Which of the following are sensible payout policies

avoid cutting positive NPV projects to pay dividend set a consisted dividend policy over time, pay out all free cash flows

Some risk adjustment to a firm WACC for projects of differing risk, even if it is subjective, is probably

better than no risk adjustment

Which of the following is true about stock dividends and stock split

both will reduce the share price both will increase the total number of shares

flotation costs are costs incurred to

bring new security issues to the market

Wacc is used to discount

cash flows

a firm ability to pay dividends may be restricted by

convents in bond indenture

flotation costs will

decrease the value of the stock

Which of the following are most apt to create problems when comparing financial statements for multiple firms

differing accounting methods seasonality differing fiscal years

The rate used to discount project cash flows is known as the

discount rate required rerun cost of capital

An ____ occurs whenever a firm makes a payment to its owners from a source other than current or accumulated retained earnings

distribution

When a payment is made from a firms earnings to its owners in the form of cash, it is called a

dividend

One method for estimating the cost of equity is based on the ___ model

dividend growth

Which of the following are advantages of paying dividends

dividend may attract institutional investors

A strong argument can be made that:

dividend policy does not matter

The issuance costs of bonds and stocks are referred to as __________ costs

flotation

The investor turnover ratio for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92

further investigation examining whether the trend is because of increased sales or decreased inventory

to apply the dividend growth model to a particular stock, you need to estimate the

growth rate the dividend yield for the next period

To a tax paying dividend stockholder, a stock repurchase generally

has significant tax advantages compared to a cash dividend

An ___ in net profit will increase ROE

increase

In reality, most firms cover the equity portion of their capital spending

intentionally generated cash flow

The crux of dividend policy is whether the firm should pay out money to its shareholders or take that money

invest it for shareholders

Finding a firms overall cost of equity is difficult because

it cannot be observed directly

a stock dividend is not a true dividend because

it is not paid in cash

What are the advantages of using internal financing

it may be cheaper than debt or equity issues it prevents the adverse market reaction that tends to accompany a stock issues

Preferred stocl

pays a constant dividend pays dividend in perpetuity

Which of the following might be tax exempts investors

pension funds trust funds university endowment funds

According to the CAPM, what is the expected return on a stock if its beta is equal to zero

the risk free rate

Which of the following are reasons for reverse stock split

to eliminate small shareholder to raise stock prices to repeatable levels to comply with listing requirements

Financial managers use a common size income statement to determine

which costs are rising or falling as a percentage of sales

A dividend __ is amount of the dividend expressed as a percentage of the stock market price

yield