Reference no: EM132523757
1. Modigliani-Miller (MM) Proposition I with NO taxes in a perfect capital market tells us that
a. The value of the levered firm is greater than the value of the unlevered firm.
b. The value of the levered firm is smaller than the value of the unlevered firm.
c. The value of the levered firm is the same as the value of the unlevered firm.
d. The value of the levered firm is equal to the market value of debt.
e. The value of the levered firm is equal to the market value of stock.
2. A stock repurchase increases, other things being equal, the:
a. retention ratio of earnings.
b. number of shares outstanding.
c. EPS.
d. owner's equity.
e. EBIT.
3. Which one of the following will decrease the after-tax cost of debt for a firm?
a. an increase in the risk level of the firm
b. an increase in corporate income tax rates
c. an increase in the risk-free rate of return
d. a decrease in the bond rating of a firm
e. a decrease in the price of the firm's outstanding bonds
4. Which of the following businesses would most likely have the higher degree of financial leverage?
a. An electric power company.
b. A high-tech computer related company.
c. A nonprofit, community theater.
d. A new local restaurant chain.
e. A water buffalo genetic research company.
5. A __________ is a procedure for issuing new securities where the firm obtains a master registration statement approved by the SEC.
a. conditional placement
b. private placement
c. 403 (b) registration
d. shelf registration
e. negotiable placement
6. When would it make sense for a firm to call (or retire) bond issue and refinance?
a. when the market price of the bond exceeds the call price, and market interest rates are greater than the bond's coupon rate
b. when the market price of the bond exceeds the call price, and market interest rates are less than the bond's coupon rate
c. when the market price of the bond is less than the call price, and market interest rates are greater than the bond's coupon rate
d. when the market price of the bond is less than the call price, and market interest rates are less than the bond's coupon rate
7. Which of the following is unlikely included in a bond covenant for lower rated bonds?
a. Restriction on investment in financial assets.
b. Restriction on cash dividend payout.
c. Restriction on the issue of convertible preferred stock.
d. Restriction on the issue of secured senior debt.
e. Restriction on the sale-and-lease-back arrangement
8. What is the most likely prediction on the ex-dividend day after a firm reduces its regular dividend payment?
a. Earnings are expected to decline.
b. Investment is expected to increase.
c. Retained earnings are expected to decrease.
d. Share price is expected to fall.
e. ROE is expected to increase.
9. Which of the following is a sensible reason to pay (or increase) cash dividends to shareholders?
a. Since a share price is the present value of expected future dividends, higher dividends payout increases a share price.
b. Since cash dividends are the shareholders' wages, a firm should pay dividends to shareholders like it pays wages to workers.
c. Cash dividends are safer than future capital gains.
d. Expected return on a new project is lower than return on a diversified portfolio in the capital market.
e. Capital loss should be compensated by additional dividends.