FIN MGMT Final Exam
stock repurchase
A company's repurchasing, or buying back, of its own common stock.
Static Theory of Capital Structure
A firm borrows up to the point where tax benefit from extra dollar in debt equals cost that comes from increased probability of financial distress
Of the options listed below, which is the best example of unsystematic risk?
A national decrease in consumer spending on entertainment
Operating cash flow equation
EBIT + Depreciation - Taxes
Which of the following statements regarding unsystematic risk is accurate?
It can be effectively eliminated by portfolio diversification
Which of the following statements regarding the weighted average cost of capital is accurate?
It is return investors require on the total assets of the firm
________ measures total risk, and _________ measures systematic risk
Standard deviation; beta
MM Proposition II
The cost of equity is a linear function of the company's debt/equity ratio.
Unexpected returns can be either positive or negative in the short term but tend to be zero over the long term
With respect to unexpected returns, which one of the following statements is accurate?
reverse split
a stock split in which a firm's number of shares outstanding is reduced
When calculating a firm's WACC, the capital structure weights:
are based on the market values of the outstanding securities
when calculating a firm's weighted average cost of capital, the capital structure weights:
are based on the market values of the outstanding securities
When utilizing the capital asset pricing model approach to value equity, the outcome:
assumes the reward-to-risk ratio is constant
A ______ is the market's measure of unsystematic risk
beta of 1
The most important reason to diversify a portfolio is to:
eliminate asset-specific risk
Cost of Preferred Stock
equivalent to the rate of return on a perpetuity
MACRS (Modified Accelerated Cost Recovery System)
every asset is assigned to a particular classification (cost of asset x fixed percentage)
Assume a firm's flotation costs are 7.8 percent of the funding need. Accordingly, when analyzing capital projects, the firm's managers should:
increase the initial project cost by dividing that cost by (1-.078)
stock split
is an increase in the firm's shares outstanding without any change in owner's equity (expressed as a ratio)
The slope of the security market line is the:
market risk premium
According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:
market risk premium & the amount of systematic inherent in the security
when calculating the expected rate of return on a stock portfolio using a weighted average, the weights are based on
market value of the investment in each stock
Depreciation
noncash deductible with cash flow consequences that influence the tax bill
divident
payment made out of the firm's earnings (typically either cash or stock)
stock dividend
payment paid by a firm to its owner in the form of a stock (commonly expressed as a percentage)
The cost of preferred stock is equivalent to the:
rate of return on a perpetuity
financial leverage
refers to the extent a firm relies on debt (the more debt financing used in capital structure the more leverage)
If the market is efficient & securities are priced fairly, all securities will have the same:
reward-to-risk ratio
For any given capital project proposal, the discount rate should be based on the:
risks associated with the use of the funds required by the project:
the_____ is a positively sloped linear function that plots securities' expected returns against their betas
security market line
To determine a firm's cost of capital, one must include:
the returns currently required by both debtholders & stockholders
MM Proposition I (no taxes)
the value of the firm is independent of the firm's capital structure
An investor who owns a well- diversified portfolio would consider _______ to be irrelevant
unsystematic risk
Market value of the investment in each stock
when calculating the expected return on a stock portfolio using a weighted average, the weights are based on the: