Corporate Finance Final Exam Questions with complete solutions. Graded A. 2022/2023

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Corporate Finance Final Exam Questions with complete solutions The term "financial leverage" originated from the notion that there is a multiplicative effect on financial performance measured at __... ______ when borrowed money is used to support the firm. - Return on Equity and Earnings per share The degree of financial leverage is measured by relating the percentage change in earnings per share to the percentage change in - EBIT Financial leverage is a direct function of the ratio of - interest expense to EBIT Which of the following would increase a firm's financial leverage? - an increase in interest expense Financial leverage increases a firm's ROE and EPS under which of the following circumstances? - ROCE> after tax cost of debt Financial leverage may benefit shareholders when the - return on capital employed is greater than the after tax cost of debt The use of fixed cost sources of funds, such as debt and preferred stock affect a firm's - financial risk The increased variability in earnings per share due to the use of debt is - financial financial risk The degree of operating leverage is measured by relating the percentage change in EBIT to the percentage change in - sales Operating leverage involves the use of - fixed costs The process of evaluating a firm's operations to determine the minimum volume it must sell to avoid losing money is referred to as - breakeven analysis The difference between fixed and variable costs is - variable costs move up and down with changes in sales while fixed costs remain constant Financial leverage involves substituting debt for equity in the firm's capital structure, operating leverage involves - substituting fixed costs for variable costs in the firm's cost sturcture The degree of total leverage is equal to the _________ multiplied by the _____________ - degree of operating leverage, degree of financial leverageIn the MM model, the mix of debt and equity that minimizes the cost of capital is the - optimal capital structure Increasing a firm's financial leverage also increases - the return on equity Business risk is associated with - the operating performance If a firm does not have debt then - the firm has no financial risk The prices that investors pay for securities are determined by - The cash flows investors expect to receive from owning them A collection of securities is called a - portfolio The executive in charge of the finance department is the company's - CFO Finance has its theoretical roots in _______, but requires a practical understanding of ________ - economics, accounting The big disadvantage of the proprietorships versus corporations is - the difficulty of raising money to start or expand the business An S-type corporation is different from a C-type corporation in which of the following way(s) - the way they are taxed The most common example of abuse of the agency relationship is - management's compensation and perquisites Which of the following best describes the agency relationship in a business setting - Management are the agents of the stockholders Depreciation, from the accounting viewpoint, can best be thought of as - allocation the cost over the period of service Which of the following does not appear on the income statement? - Accumulated depreciation The income statement line item that shows the performance of operating activities without consideration of financing is - EBIT Net working capital can be referred to as - current assets minus current liabilities The net book value of an asset is - original cost less accumulated depreciationWhich of the following would cause a decrease in cash - lengthening the time it takes to collect receivables from 15 to 30 days The marriage penalty refers to the fact that - two-income married couples generally pay more taxes than they would if they were single and had the same two incomes Dividend payments are categorized as - cash flow from financing activities Ratios are used to analyze activities in the following areas - asset management, liquidity, profitability, debt management, market value The reliability of the current ratio as a measure of liquidity can be reduced by - inventory that will not sell The ___________ ratio, sometimes called the "acid test", is a more stringent measure of __________ than the current ratio - quick, liquidity The primary function of financial markets is to - facilitate the movement of cash from savers to companies that need money Financial markets include - Al the above: Capital markets, money markets, primary markets and secondary markets Firms raise capital by issuing various types of _________ such as ______________ - securities, stocks & bonds A sale of stock between two investors is a _______________ market transaction - secondary Which organization typically helps a company market new securities - investment bank The __________ has traditionally been called the "over-the-counter" market - NASDAQ The nominal rate on a loan - differs from the real interest rate by an inflation premium The principle behind time value of money is based on the fact that - a sum of money in hand today is worth MORE than the same sum in the future AND a sum of money in the future is worth LESS than the same sum in hand today The process of finding present values is frequently called - discounting If the interest rate is 0% - the present value of amounts to be received in the future is equal to the sum of those amounts The present value factor (PVF) and the future value factor (FVF) are related - as reciprocalsOpportunity cost is the - benefit that would have been available from the next best use of money Finding the discounted value of $1000 to be received at the end of each of the next five years requires calculating the - present value of an annuity When a loan is amortized over a five year term, the - amount of interest paid is reduced each year If a series of equal payments is paid regularly out of a bank account which earns a constant rate of interest, the _____ is the amount that must be in the bank at the beginning of the series to just fund all of the payments - present va [Show More]

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