Knowledge Check - Chap 15

The risk which is inherent in a firm's operations b. using the standard deviation of the firm's
even without the use of debt is known as return on invested capital.
business risk and is commonly measured by
Which of the following statements is NOT true d. The lower the percentage of total costs that
about operating leverage? are fixed, the higher degree of operating
leverage a firm will have.
The Hamada equation was formulated to c. quantify the effect of leverage on the cost of
equity
Gustav Company has a levered beta of 1.2. b. 0.8419
Their capital structure consists of 35% debt
and 65% common equity. Considering a tax
rate of 21%, what is Gustav's unlevered beta?
Which of the following is correct about the b. Deductibility of interest favors a higher debt
effect of taxes on capital structure? ratio and favorable tax treatment of stock
income favors a higher equity ratio.
Which of the following is NOT correct about c. Selling stock emits a positive signal for a
signaling theor company and investors will likely see the
company as increasing in value
How do the attitudes of managers affect capital e. Managers often exercise their own judgment
structure decisions? about the proper capital structure and their
decisions are impacted by whether they tend to
be more conservative or more aggressive.
Rocher, Inc. is evaluating their capital structure. a. $85,360
They are analyzing the firm's asset structure
and wish to determine their net debt so they
can determine if they will be able to take on
more debt. Currently, they have cash of
$41,040, short-term debt of $86,000, long-
term debt of $92,400, and $52,000 in cash
equivalents. What is Rocher's total net debt?
The times interest earned (TIE) ratio provides c. The TIE ratio is dependent on a company's
an indication of a company's vulnerability to percentage of debt, interest rate on the debt,
stress. What three factors is the TIE ratio and its profitability.
dependent on?
Colleen's Courier Company has a capital d. 7.82
structure that is currently 50% debt and 50%
equity. Last year the company had EBIT of
$1,692,500 and paid interest of $216, 500 and
taxes of $119,000. The company does have a
considerable amount of assets but with the
higher percentage of debt, they are concerned
more debt could be too risky and want to use
the TIE ratio to get an idea of their vulnerability
for financial problems. What is the company's
Knowledge Check - Chap 16

1. The optimal dividend policy strikes a balance TRUE

between current dividends and capital gains
that maximizes the firm's stock price.
Which of the following statements is TRUE d. None of these answers are correct.
about the Dividend Irrelevancy Theory?
Suppose a firm is increasing its dividends from FALSE
$1 to $1.50. The stock price increases
significantly. Some people would argue that
this is proof that investors prefer dividends to
retained earnings. Miller and Modigliani would
agree with this argument.
Some investors prefer a high payout so he or TRUE
she could receive cash without going to the
trouble and expense of selling stocks. On the
other hand, some investors just reinvest any
dividends received and prefer a low-payout
company because that would save him or her
taxes and brokerage costs. This is what is
referred to the clientele effect.
A firm adheres strictly to the residual dividend b. no dividends to common stockholders.
policy, and if its optimal capital budget requires
the use of all retained earnings for a given year
(along with new debt according to the optimal
debt/total assets ratio), then the firm should
pay
If a firm adheres strictly to the residual dividend c. no dividends will be paid during the year
policy and company issues new common stock,
this would suggest:
If a high percentage of stockholders elect to TRUE
have all of their dividends reinvested, the
company should reconsider its dividend policy
and possibly move to a lower payout ratio.
There are two types of dividend reinvestment TRUE
plans. Under one type of plan, the firm uses the
cash that would have been paid as dividends to
buy stock on the open market. Under the other
type, the company issues new stock, keeps the
cash that would have been paid out, and in
effect sells new stock to those investors who
choose to reinvest their dividends.
Which of the following does influence a firm's e. All of the above
dividend policy decision?
Which of the following would be most likely to c. Its R&D efforts pay off, and it now has more
lead to a decrease in a firm's dividend payout high-return investment opportunities.
ratio?
You own 100 shares of a stock that currently b. You will have 2,000 shares of stock, and the
sells for $1,200 a share. The company is about stock will trade at or near $60 a share.
to declare a 20-for-1 stock split. Which of the
following best describes your likely position
after the split?
If a firm declares a 20:1 stock split, and after TRUE
the split the price actually increases. The
higher price could be due to signaling effects--
investors believe that management split the
stock because they think the firm is going to do
better in the future.
The three principal types of stock repurchases d. All of these answer choices are correct
are
What is NOT an advantage of repurchases b. Company pays a high price for the
repurchased shares which benefits remaining
stockholder.

Knowledge Check - Chap 17

Other things held constant, which of the
following will cause an increase in net working
capital?
Which of the following statements best
describes working capital?
A restricted policy indicates a ____________
level of assets, which results in a ________
return on equity.
What can lead to a change in the optimal
working capital policy?
An aggressive approach to current asset
financing calls can be described as
Maturity matching or the self-liquidating
approach describes a current asset financing
policy that:
Which of the following is NOT a part of the
cash conversion cycle calculation?
Other things held constant, which of the
following would tend to reduce the cash
conversion cycle?
Which of the following statements concerning
the cash budget is CORRECT?
c. Merchandise is sold at a profit, but the sale is
on credit
a. Current assets are often called working
capital.
b. Low, high
a. a change in technology
d. financing some of its permanent assets
partially with short term debt.
calls for matching assets and liability
maturities.
d. Receivable deferral period
b. Reduce receivables without affecting sales
a. Depreciation expense is not explicitly
included, but depreciation's effects are
reflected in the estimated tax payments.
Which of the following is NOT directly reflected b. Depreciation
in the cash budget of a firm that is in the zero
tax bracket?
Which of the following is NOT a technique to a. Hold demand deposits rather than
optimize demand deposit holdings? marketable securities to provide liquidity.
Firms purchase marketable securities as d. cash builds up from operations and then sell
those securities when they need more cash
Which of the following is NOT included in e. Storage cost
inventories?
Inventory level forecasting is important to avoid e. All of these are correct
What is NOT a part of credit policy? e. Interest Rate
Credit Policy is important because of all of b. Affects the interest rate the company pays.
these reasons EXCEPT:
If one of your firm's customers is "stretching" FALSE
its accounts payable, meaning they do not pay
you on time but eventually pays. This may be a
nuisance but it does not represent a real
financial cost to your firm because the
customer pays off the balance.
If a firm buys on terms of 2/10, net 30 this c. You receive a 2 percent discount when you
means pay within 10 days
What is NOT a feature of a promissory note? e. Sincerity
The effective interest rate on a loan depends c. LIBOR rate
on which of the following?
Commercial paper is a promissory note issued b. $100,000
by a large firm, usually in denominations of
Each of the following is true for accruals b. Include spontaneous funds
EXCEPT:
Which of the following can serve as collateral d. All of these can serve as collateral
for an unsecured short-term loan?