FIN 534

1. Which of the following statements is correct?

2. Which of the following should not influence a firm’s dividend policy decision?

3. Which of the following statements is correct?

4. 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?

5. Which of the following statements is correct?

6. Which of the following statements is correct?

7. 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

8.Which of the following statements is correct?

9.If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

10. Which of the following statements is correct?

11. Which of the following statements about dividend policies is correct?

12. In the real world, dividends

13. 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

14. 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?

15. Which of the following actions will best enable a company to raise additional equity capital?

16. Which of the following statements is CORRECT?

17. Which of the following statements is CORRECT?

18. Reynolds Resorts is currently 100% equity financed. The CFO is considering a recapitalization plan under which the firm would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock. The recapitalization would not change the company’s total assets, nor would it affect the firm’s basic earning power, which is currently 15%. The CFO believes that this recapitalization would reduce the WACC and increase stock price. Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan?

19. Which of the following statements is CORRECT, holding other things constant?

20. The firm’s target capital structure should be consistent with which of the following statements?

21. Which of the following statements is CORRECT?

22. An increase in the debt ratio will generally have no effect on which of these items?

23. Based on the information below, what is Ezzel Enterprises’ optimal capital structure?

24. Which of the following statements is CORRECT?

25. Firms U and L each have the same amount of assets, and both have a basic earning power ratio of 20%. Firm U is unleveraged, i.e., it is 100% equity financed, while Firm L is financed with 50% debt and 50% equity. Firm L’s debt has a before-tax cost of 8%. Both firms have positive net income. Which of the following statements is CORRECT?

26. 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?

27. Which of the following statements is CORRECT?

28. Which of the following statements is CORRECT?

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

30. Which of the following statements is CORRECT?