Finance quizzes 9,11-13

Which one of the following will affect the capital structure weights used to compute a firm's weighted average cost of capital?

Increase in the market value of the firm's common stock

Paying interest reduces the taxes owed by a firm. Which one of the following terms applies to this relationship?

Interest tax shield

Which one of the following is a direct bankruptcy cost?

Legal and accounting fees related to a bankruptcy proceeding

Which one of the following supports the theory that the value of a firm increases as the firm's level of debt increases?

M&M Proposition I with taxes

Turner Industries started a new project three months ago. Sales arising from this project are significantly less than anticipated. Given this, which one of the following is management most apt to implement?

Option to abandon

The level of financial risk to which a firm is exposed is dependent on the firm's:

debt-equity ratio.

The tax shield approach to computing the operating cash flow, given a tax-paying firm:

recognizes that depreciation creates a cash inflow.

The analysis of a new project should exclude

sunk costs

Portfolio diversification eliminates:

unsystematic risk.

Chapter 11

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Chapter 12

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Chapter 13

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Chapter 9

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A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock?

A decrease in the probability of an economic boom

Which one of the following best defines legal bankruptcy?

A legal proceeding for liquidating or reorganizing a business

Which one of the following is the equity risk arising from the daily operations of a firm?

Business risk

Which one of the following statements concerning financial leverage is correct?

Financial leverage magnifies both profits and losses.

Which one of the following is the equity risk arising from the capital structure selected by a firm?

Financial risk

Which of the following create cash inflows from net working capital?

Increase in accounts payable and decrease in inventory

Which one of the following terms applies to the costs incurred by a firm that is trying to avoid filing for bankruptcy?

Indirect bankruptcy costs

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent?

Portfolio weight

Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project's net present value. What type of analysis is being conducted?

Sensitivity analysis

Which one of the following is most apt to cause a wise manager to increase a project's cost of capital? Assume the firm is levered.

She learns the project is riskier than previously believed.

Which one of the following statements is correct related to the dividend growth model approach to computing the cost of equity?

The annual dividend used in the computation must be for Year 1 if you are Time 0's stock price to compute the return.

Which one of the following statements matches M&M Proposition I without taxes?

The value of a firm is independent of the firm's capital structure.

Which one of the following represents the minimum rate of return a firm must earn on its assets if it is to maintain the current value of its securities?

Weighted average cost of capital

A portfolio is:

a group of assets held by an investor.

A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions. By doing so, the firm:

automatically gives preferential treatment in the allocation of funds to its riskiest division.

The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the:

beta coefficient

The capital asset pricing model:

considers the relationship between the fluctuations in a security's returns versus the market's returns.

The weighted average cost of capital is defined as the weighted average of a firm's:

cost of equity, cost of preferred, and its aftertax cost of debt

Scenario analysis:

helps determine the reasonable range of expectations for a project's anticipated outcome

A firm that uses its weighted average cost of capital as the required return for all of its investments will:

increase the risk level of the firm over time.

When evaluating a project, the dividend growth model:

is relatively simple to use.

Ignoring the option to wait:

may underestimate the net present value of a project.

The net working capital invested in a project is generally:

recouped at the end of the project.

Kate is the CFO of a major firm and has the job of assigning discount rates to each project under consideration. Kate's method of doing this is to assign an incrementally higher rate as the risk level of the project increases and a lower rate as the risk level declines. Kate is applying the ________ approach

subjective

For a risky security to have a positive expected return but less risk than the overall market, the security must have a beta:

that is > 0 but < 1.

When a firm faces hard rationing

there will be no available funds for capital expenditures

Standard deviation measures ________ risk while beta measures ________ risk.

total; systematic

Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC?

Cost of equity

Which one of the following will increase the operating cash flow as computed using the tax shield approach?

Decrease in fixed costs

Which one of these is the best example of systematic risk?

Decrease in gross domestic product

Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

Diversification