Financial Management Quiz Paper

FIN 534 (Strayer) Financial Management Week 9 Quiz 8

Question 1 2 out of 2 points

Which of the following statements about dividend policies is correct? Answer Selected Answer:

The clientele effect suggests that companies should follow a stable dividend policy.

Correct Answer:

The clientele effect suggests that companies should follow a stable dividend policy.

Question 2 2 out of 2 points

If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that Answer Selected Answer:

no dividends were paid during the year.

Correct Answer:

no dividends were paid during the year.

Question 3 2 out of 2 points

Which of the following statements is correct? Answer Selected
Answer:

If a firm repurchases some of its stock in the open market, then shareholders who sell their stock for more than they paid for it will be subject to capital gains taxes.

Correct Answer:

If a firm repurchases some of its stock in the open market, then shareholders who sell their stock for more than they paid for it will be subject to capital gains taxes.

Question 4 2 out of 2 points

Which of the following statements is CORRECT? Answer Selecte d Answer: If a firm’s stock price is quite high relative to most stocks—say $500 per share—then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively low—say $2 per share—then it can declare a “reverse split” of say 1-for-25 so as to bring the price up to somewhere around $50 per share.

Correct Answer:

If a firm’s stock price is quite high relative to most stocks—say $500 per share—then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively low—say $2 per share—then it can declare a “reverse split” of say 1-for-25 so as to bring the price up to somewhere around $50 per share.

Question 5 2 out of 2 points

Which of the following statements is correct? Answer Selected Answer:

Stock repurchases make the most sense at times when a company believes its stock is undervalued.

Correct Answer:

Stock repurchases make the most sense at times when a company believes its stock is undervalued.

Question 6 2 out of 2 points

Which of the following should not influence a firm’s dividend policy decision? Answer Selected Answer:

The fact that much of the firm’s equipment has been leased rather than bought and owned.

Correct Answer:

The fact that much of the firm’s equipment has been leased rather than bought and owned.

Question 7 2 out of 2 points

If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with

new debt according to the optimal debt/total assets ratio), then the firm should pay Answer Selected Answer:

no dividends to common stockholders.

Correct Answer:

no dividends to common stockholders.

Question 8 2 out of 2 points

You own 100 shares of Troll Brothers’ stock, which currently sells for $120 a share. The company is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be after such a split takes place? Answer Selected Answer:

You will have 200 shares of stock, and the stock will trade at or near $60 a share.

Correct Answer:

You will have 200 shares of stock, and the stock will trade at or near $60 a share.

Question 9 2 out of 2 points

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based

on the assumption that Answer Selected Answer:

investors view dividends as being less risky than potential future capital gains.

Correct Answer:

investors view dividends as being less risky than potential future capital gains.

Question 10 2 out of 2 points

Which of the following statements is correct? Answer Selected Answer:

Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm’s financial risk.

Correct Answer:

Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm’s financial risk.

Question 11 2 out of 2 points

Which of the following would be most likely to lead to a decrease in a firm’s dividend payout ratio? Answer

Selected Answer:

Its R&D efforts pay off, and it now has more high-return investment opportunities.

Correct Answer:

Its R&D efforts pay off, and it now has more high-return investment opportunities.

Question 12 2 out of 2 points

Which of the following statements is correct? Answer Selected Answer:

If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense. However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.

Correct Answer:

If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense. However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.

Question 13 2 out of 2 points

Firm M is a mature firm in a mature industry. Its annual net income and net cash flows are both consistently high and stable. However, M’s growth prospects are quite limited, so its capital budget is small relative to its net income. Firm N is a relatively new firm in a new and growing industry. Its

markets and products have not stabilized, so its annual operating income fluctuates considerably. However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future. Which of the following statements is correct? Answer Selected Answer:

Firm M probably has a higher dividend payout ratio than Firm N.

Correct Answer:

Firm M probably has a higher dividend payout ratio than Firm N.

Question 14 2 out of 2 points

Which of the following statements is correct? Answer Selected Answer:

If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy.

Correct Answer:

If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy.

Question 15 2 out of 2 points

Which of the following statements is correct? Answer Selected Answer:

Very often, a company’s stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen.

Correct Answer:

Very often, a company’s stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen.

Question 16 2 out of 2 points

Which of the following would increase the likelihood that a company would increase its debt ratio, other things held constant? Answer Selected Answer:

An increase in the corporate tax rate.

Correct Answer:

An increase in the corporate tax rate.

Question 17 2 out of 2 points

Which of the following statements is CORRECT? Answer Selected Answer:

The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC).

Correct Answer:

The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC).

Question 18 0 out of 2 points

Companies HD and LD have the same total assets, operating income (EBIT), tax rate, and business risk. Company HD, however, has a much higher debt ratio than LD. Also HD’s basic earning power (BEP) exceeds its cost of debt (rd). Which of the following statements is CORRECT? Answer Selected Answer:

HD should have a higher times interest earned (TIE) ratio than LD.

Correct Answer:

HD should have a higher return on equity (ROE) than LD, but its risk, as measured by the standard deviation of ROE, should also be higher than LD's.

Question 19 2 out of 2 points

Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure? Answer Selected Answer:

The corporate tax rate increases.

Correct Answer:

The corporate tax rate increases.

Question 20 0 out of 2 points

Which of the following statements is CORRECT? Answer Selected Answer:

Since a firm's beta coefficient it not affected by its use of financial leverage, leverage does not affect the cost of equity.

Correct Answer:

Increasing a company’s debt ratio will typically increase the marginal cost of both debt and equity financing. However, this action still may lower the company’s WACC.

Question 21 2 out of 2 points

Which of the following statements is CORRECT? Answer Selected

Answer: The factors that affect a firm’s business risk are affected by industry characteristics and economic conditions. Unfortunately, these factors are generally beyond the control of the firm's management. Correct Answer:

The factors that affect a firm’s business risk are affected by industry characteristics and economic conditions. Unfortunately, these factors are generally beyond the control of the firm's management.

Question 22 2 out of 2 points

The firm’s target capital structure should be consistent with which of the following statements?
Answer Selected Answer:

Minimize the weighted average cost of capital (WACC).

Correct Answer:

Minimize the weighted average cost of capital (WACC).

Question 23 2 out of 2 points

Business risk is affected by a firm's operations. Which of the following is NOT associated with (or does not contribute to) business risk? Answer Selected Answer:

The extent to which interest rates on the firm's debt fluctuate.

Correct Answer:

The extent to which interest rates on the firm's debt fluctuate.

Question 24 0 out of 2 points

If debt financing is used, which of the following is CORRECT? Answer Selected Answer:

The percentage change in net income relative to the percentage change in net operating income will depend on the interest rate charged on debt.

Correct Answer:

The percentage change in net income will be greater than the percentage change in net operating income.

Question 25 2 out of 2 points

Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant? Answer

Selected Answer:

An increase in the corporate tax rate.

Correct Answer:

An increase in the corporate tax
rate.

Question 26 0 out of 2 points

Companies HD and LD have identical tax rates, total assets, and basic earning power ratios, and their basic earning power exceeds their before-tax cost of debt, rd. However, Company HD has a higher debt ratio and thus more interest expense than Company LD. Which of the following statements is CORRECT? Answer Selected Answer:

Company HD has a lower ROE than Company LD.

Correct Answer:

Company HD has a lower ROA than Company LD.

Question 27 0 out of 2 points

Which of the following statements is CORRECT?
As a firm increases the operating leverage used to produce a given quantity of output, this will Answer Selected

Answer: Correct Answer:

normally lead to an increase in its fixed assets turnover ratio.

normally lead to a reduction in its fixed assets turnover ratio.

Question 28 2 out of 2 points

Which of the following statements is CORRECT? Answer Selected Answer:

The capital structure that minimizes the WACC also maximizes the price per share of common stock.

Correct Answer:

The capital structure that minimizes the WACC also maximizes the price per share of common stock.

Question 29 2 out of 2 points

Which of the following statements is CORRECT? Answer Selected Answer:

If corporate tax rates were decreased while other things were held constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital structure were correct, this would tend to cause corporations to decrease their use of debt.

Correct Answer:

If corporate tax rates were decreased while other things were held constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital structure were correct, this would tend to cause corporations to decrease their use of
debt.

Question 30 2 out of 2 points

Which of the following statements is CORRECT? Answer Sele cted Ans wer:

The optimal capital structure simultaneously maximizes stock price and minimizes the WACC.

Corr ect Ans wer:

The optimal capital structure simultaneously maximizes stock price and minimizes the WACC.

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Question 1
2 out of 2 points

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption that Answer Selected Answer: Correct Answer: investors view dividends as being less risky than potential future capital gains. investors view dividends as being less risky than potential future capital gains.
•

Question 2
2 out of 2 points

If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay Answer Selected Answer: Correct Answer: no dividends to common stockholders. no dividends to common stockholders.
•

Question 3
2 out of 2 points