Fin Test 3

internal funds

According to ________, a company borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs. the static theory of capital structure According to the pecking-order theory, firms prefer to use ________ before any other form of financing

Pure Play

Assume a manager determines the cost of capital for a specific project based on the cost of capital at another firm with a line of business that is like the project. Accordingly, the manager is using the ________ approach

return on a riskless asset

CAPM shows that the expected return for a particular asset depends on all the following except

strong

The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient

· assign appropriate, but differing, discount rates to each business line and then select the projects with the highest net present values.

Velasquez Manufacturing has two vastly different lines of business: Alpha and Omega. The Alpha line is the riskiest of the two, and accounts for 72 percent of the firm's sales. When deciding which project proposals should be accepted, the managers should

standard deviation; beta

___ measures total risk and _____ measures systematic risk

companies stockpile internally generated cash

according to the pecking order theory

unsystematic risk

an investor who owns a well diversified portfolio would consider ___ to be irrelevant

based on the market values of the outstanding securities

calculating a firms WACC, the capital structure weights are

risky

expected return is the return on an _____ asset expected in the future

dependent upon a company's capital structure

financial risk

reward to risk ratio

if the market is efficient and securities are price fairly all securities will have the same

Cost of Debt

interest rate is called

weighed

portfolio beta is the _____ average of the betas of the investments included in the portfolio

true

risk-free assets have a beta of 0 and the market portfolio has a beta of 1

false

the arithmetic average tells you what you earned per year

is positively related to the company's cost of equity

the business risk of a company

The cost of equity

the return that equity investors require on their investment in the firm

beta

the security market line is a positively sloped straight line that displays the relationship between expected return and ___

WACC is minimized

the value of a firm is maxed when

geometric averages

when attempting to forecast for extremely long intervals such as 50 years it is best to use

it can be effectively eliminated by portfolio diversification

which if the following regarding unsystematic risk is true

The optimal capital structure maximizes shareholder value.

which is true

the info was expected

which of the following is the most likely reason why a stock price might not react ay all on the day that new info related to the stocks issuer is released?

Cap gain yield and total return

which of the following yields on a stock can be negative

Paying an outside accountant to prepare bankruptcy reports.

which one of the following is a direct cost of bankruptcy