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