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Question
Which of the following statements is CORRECT?a. Electric utilities generally have very high common equity ratios because their revenues are more volatile than those of firms in most other industries.
b. Drug companies (prescription, not illegal!) generally have high debt-to-equity ratios because their earnings are very stable and, thus, they can cover the high interest costs associated with high debt levels.
c. Wide variations in capital structures exist both between industries and among individual firms within given industries. These differences are caused by differing business risks and also managerial attitudes.
d. Since most stocks sell at or very close to their book values, book value capital structures are almost always adequate for use in estimating firms' costs of capital.
e. Generally, debt-to-total-assets ratios do not vary much among different industries, although they do vary among firms within a given industry.
Answer
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Related questions
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a. True
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You are given the following returns on "the market" and Stock F during the last three years. We could calculate beta using data for Years 1 and 2 and then, after Year 3, calculate a new beta for Years 2 and 3. How different are those two betas, i.e., what's the value of beta 2 - beta 1? (Hint: You can find betas using the Rise-Over-Run method, or using your calculator's regression function.) Year Market Stock F1 6.10% 6.50%2 12.90% -3.70%3 16.20% 21.71%a. 7.89b. 8.30c. 8.74d. 9.20e. 9.66
Q:
In a portfolio of three different stocks, which of the following could NOT be true?
a. The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
b. The beta of the portfolio is less than the betas of each of the individual stocks.
c. The beta of the portfolio is greater than the beta of one or two of the individual stocks' betas.
d. The beta of the portfolio cannot be equal to 1.
e. The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.
Q:
Stock A has an expected return rA = 10% and σA = 10%. Stock B has rB = 14% and σB = 15%. rAB = 0. The rate of return on riskless assets is 6%.a. Construct a graph that shows the feasible and efficient sets, giving consideration to the existence of the riskless asset.b. Explain what would happen to the CML if the two stocks had (a) a positive correlation coefficient or (b) a negative correlation coefficient.c. Suppose these were the only three securities (A, B, and riskless) in the economy, and everyone's indifference curves were such that they were tangent to the CML to the right of the point where the CML was tangent to the efficient set of risky assets. Would this represent a stable equilibrium? If not, how would an equilibrium be produced?
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a. True
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The problem of dilution of stockholders' earnings never results from the sale of call options, but it can arise if warrants are used.
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a. True
b. False
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A leveraged lease is more risky from the lessee's standpoint than an unleveraged lease.
a. True
b. False
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From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee's
a. capital budgeting project cash flows.
b. debt cash flows.
c. pension fund cash flows.
d. sales.
e. equity cash flows.
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Operating leases help to shift the risk of obsolescence from the user to the lessor.
a. True
b. False
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Which of the following factors would increase the likelihood that a company would call its outstanding bonds at this time?
a. A provision in the bond indenture lowers the call price on specific dates, and yesterday was one of those dates.
b. The flotation costs associated with issuing new bonds rise.
c. The firm's CFO believes that interest rates are likely to decline in the future.
d. The firm's CFO believes that corporate tax rates are likely to be increased in the future.
e. The yield to maturity on the company's outstanding bonds increases due to a weakening of the firm's financial situation.
Q:
Which of the following statements is NOT CORRECT?
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b. Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC.
c. When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market.
d. It is possible for a firm to go public and yet not raise any additional new capital.
e. When a corporation's shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closely, or privately, held."
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If its managers make a tender offer and buy all shares that were not held by the management team, this is called a private placement.
a. True
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Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price of $9,708.74, with a maturity value of $10,000. The exchange rate at that time was 1.420 Swiss francs per dollar. Today, at maturity, the exchange rate is 1.324 Swiss francs per dollar. What is the annualized rate of return to the Swiss investor?
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d. 8.25%
e. 12.00%
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Exhibit 28.3Assume that Palmer Executive Pens uses 1,440,000 gallons of ink each year. Further, assume that Palmer can order the ink at a cost of $2 per gallon plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost.Refer to Exhibit 28.3. Now, suppose the manufacturer offers a discount of 0.5 percent for orders of a least 40,000 gallons. Should Palmer increase its ordering quantity to take the discount?a. Yes; it will save $827 if it takes the discount.b. No; it will lose $827 if it takes the discount.c. Yes; it will save $14,400 if it takes the discount.d. Yes; it will save $13,573 if it takes the discount.e. No; it will lose $13,573 if it takes the discount.
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If a company increases its safety stock, then its EOQ will go up.
a. True
b. False
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Halliday Inc. receives a $2 million payment once a year. Of this amount, $700,000 is needed for cash payments made during the next year. Each time Halliday deposits money in its account, a charge of $2.00 is assessed to cover clerical costs. If Halliday can hold marketable securities that yield 5 percent, and then convert these securities to cash at a cost of only the $2 deposit charge, what is the total cost for one year of holding the minimum cost cash balance according to the Baumol model?a. $7,483b. $187c. $3,741d. $374e. $748
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Danby Design Inc. has approached the bank with its plan to borrow $12,000. The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments. What is the approximate (nominal) rate of interest on the 10.19 percent add-on loan?a. 5.10%b. 10.19%c. 12.00%d. 20.38%e. 30.57%
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b. $67,531
c. $60,000
d. $68,182
e. $67,423
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a. $111,000
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c. $112,360
d. $89,000
e. $108,840
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Suppose that you're planning a vacation and borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent, with interest prepaid (a discounted loan). Also, assume that the bank requires you to maintain a compensating balance equal to 20 percent of the initial loan value. What effective annual interest rate are you being charged?a. 14.00%b. 8.57%c. 16.28%d. 21.21%e. 28.00%
Q:
Which of the following is not correct for a firm with seasonal sales and customers who all pay promptly at the end of 30 days?
a. The quarterly uncollected balances schedule will be the same in each quarter.
b. The level of accounts receivable will be constant from month to month.
c. The ratio of accounts receivable to sales will vary from month to month.
d. The level of accounts receivable at the end of each quarter will be the same.
e. DSO will vary from month to month.
Q:
DSO analysis of accounts receivable is the most robust way to see if customers are, on average, paying more slowly, because it is unaffected by seasonal changes in sales.
a. True
b. False