FIN3101 Exam 2 True or False

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

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

True

the standard deviation is the square root of the variance

False

the unlimited liability feature of equities means that investors cannot lose money on stocks

True

"WACC" stands for weighted average cost of capital

False

"diversifiable risk", "company-specific" risk, "unsystematic" risk and "market" risk all refer to the same type of risk

False

An increase in accounts receivable constitutes a use of cash while a decrease in accounts payable constitutes a source of cash

False

COGS appears on the asset side of the balance sheet

False

Ceteris paribus, lower standard deviations represent greater risk

True

If CFFA is 100, CFTC is 60 and dividends paid is 20, then the firm repurchased stock in the amount of 20

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

False

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

in order to properly evaluate a stock, investors need only consider its risk

An optimal

___ capital structure refers to a combination of debt and equity that maximizes the value of the firm

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

True

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

False

calculation of retained earning is one of the factors cited by our author for why NI and CF may be different

True

ceteris paribus, an increase in accounts receivable would reduce CFFA

True

ceteris paribus, debt is a cheaper source of funds for a corporation

True

ceteris paribus, riskier firms will have higher WACCS

False

changes in interest expense do not affect a firm's cash position

False

financial leverage can magnify gains but not losses

True

if a firm borrows at 6% and earns 8& on the borrowed funds, then adding debt would benefit shareholders

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

just like stocks the market value of bonds at maturity is equal to their par value

True

our author discusses the average return and standard deviation for 4 different assets for the period 1950 - 1999

False

replacing equity financing with debt financing always leads to higher EPS

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

False

the balance sheet identity indicates that total liabilities can be found by adding total assets to total equity

False

the best measure to use when comparing alternative investments is the amount of the dollar gain or loss

false

unlike investors in bonds, investors in stocks do not have the opportunity to realize regularly recurring income

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