Multiple Choice Answers

Noncash charges such as depreciation and amortization ________ the firm’s breakeven
a. decrease
b. understate
c. overstate
d. do not affect

A corporation has $5,000,000 of 10 percent bonds and $3,000,000 of 12 percent
preferred stock outstanding. The firm’s financial breakeven (assuming a 40 percent
tax rate) is
a. $860,000.
b. $716,000.
c. $1,400,000.
d. $1,100,000.

Operating and financial constraints placed on a corporation by loan provision are
a. agency costs to the lender.
b. interest rate costs to the firm.
c. necessary to control the risk of the firm.
d. agency costs to the firm.

According to the traditional approach to capital structure, the value of the firm will be
maximized when
a. the financial leverage is maximized.
b. the weighted average cost of capital is minimized.
c. the cost of debt is minimized.
d. the dividend payout is maximized.

Nico Trading Company must choose its optimal capital structure. Currently, the fi rm
has a 20 percent debt ratio and the firm expects to generate a dividend next year of
$5.44 per share. Dividends are expected to remain at this level indefinitely. Stockholders
currently require a 12.1 percent return on their investment. Nico is considering
changing its capital structure if it would benefit shareholders. The firm estimates
that if it increases the debt ratio to 30 percent, it will increase its expected dividend
to $5.82 per share. Again, dividends are expected to remain at this new level indefi –
nitely. However, because of the added risk, the required return demanded by stock
holders will increase to 12.6 percent. Based on this information, should Nico make
the change?
a. Yes
b. No
c. It’s irrelevant
d. Not enough information

A firm that has a large percentage of ________ investors may pay out a lower percentage
of its earnings as dividends.
a. wealthy
b. business
c. middle-income
d. pension fund

Mr. R. owns 20,000 shares of ABC Corporation stock. The company is planning to
issue a stock dividend. Before the dividend Mr. R. owned 10 percent of the outstanding
stock, which had a market value of $200,000, or $10 per share. Upon receiving
the 10 percent stock dividend the value of his shares is
a. $210,000.
b. $200,000.
c. $220,000.
d. greater, but cannot be determined.

The accounting in a stock split will transfer funds
a. from the Retained Earnings account to the Paid in Capital account.
b. from the Common Stock and Paid in Capital accounts to the Retained Earnings account.
c. from the Paid in Capital account to the Retained Earnings account.
d. from the Retained Earnings account to the Preferred Stock account.
e. none of the above