1 True False While there have long been attempts to reduce risk to concrete measures, we are not yet to the point where any one measure adequately describes risk in every situation 2 True False Despite the development of more sophisticated approaches, sensitivity analysis and break even analysis continue to be useful tools 3 True False The expected value is a commonly used measure of dispersion 4 True False The standard deviation is expressed in squared units but the variance is expressed in the same units as the observations 5 True False The standard deviation can combine hundreds of possible outcomes in a single risk statistic 6 True False The coefficient of variation is calculated by dividing the standard deviation by the expected value 7 True False Utility theory is a very useful tool and many corporations are spending many dollars mapping the utility functions of senior level executives and stockholders 8 True False Most senior executives are risk averse, meaning they will seek risk only if they expect to be compensated for it 9 True False The choice of risk perspective has little influence the choice of the risk measurement statistic 10 True False Sensitivity analysis changes multiple variables at one time, while scenario analysis changes just one variable at a time 11 True False Income breakeven analysis usually results in a higher breakeven point than NPV breakeven 12 True FalseExpected net present values are calculated by multiplying the possible NPV's by the probabilities and then adding these solutions 13 True FalseDecision trees are gaining in popularity because they identify embedded options and they force managers to do contingency planning 14 True False History, expert opinion, and government mandatesare three methods for developing probability estimates 15 True False Sequential investing is a way to measure risk not a way to manage risk 16 True False The weighted average cost of existing capital is the change in the total returns needed to satisfy investors in light of new investment, divided by the amount of capital needed for the investment True False The rate paid on the funds raised by the corporation and then used for a new capital investment is the appropriate discount rate for you to use in capital budgeting regardless of the risk of the project True False A new investment should not be justified by the benefits of moving to an optimal capital structure The benefit of moving to an optimal capital structure can be had by raising more of one type of capital and using the proceeds to retire another, without making new investments True False Flotation costs are the costs associated with retiring an old issue of debt or equity, such as the fees paid to investment bankers for handling the sale True False When calculating the cost of preferred stock, we need not adjust for taxes because dividends do not result in a decrease in the company's income tax True False The mean variance capital asset pricing model approach differs from the constant growth dividend valuation model and the earnings yield model in that it focuses on market returns for investments of similar risk rather than on investor response to a particular security True False If markets are perfectly efficient, the market values of debt and equity will equal present values of the expected cash flows for each of these sources of funding True False For capital budgeting, we use projected cash flows, not income statement numbers so deferred taxes are a major source of funding and needs to be considered in calculating the weighted average cost of capital True False When short term debt is used as permanent financing and it is clearly part of the company's permanent capital in substance, then it should be treated like other long term debt in cost of capital analysis True False Accounts payable and accrued expenses are a major source of funding that have explicit cost and therefore need to be considered in calculating the weighted average cost of capital True False In the absence of market imperfections, the capital structure that maximizes the value of the firm will also be the capital structure that minimized the weighted average cost of capital True False In reality (not a perfect market) risk, firm value, and the attractiveness of capital investments will likely be affected by capital structure decisions True False The agency cost of equity is highest in an all debt firm True False Spin off cost is an important deterrent to using too much debt True False Capital structure can be part of a system designed to assure that managers maximize their own wealth by acting in the interest of the shareholders True False Expected bankruptcy costs decrease as the amount of debt increases True False Bankruptcy by itself does not decrease the value of the firm however, the friction cost associated with bankruptcy does decrease wealth True False Information asymmetries are more likely to occur when the company is changing its strategy True False If a competitor (more heavily leveraged than your company) experiences a positive response to an increase in leverage, this suggests that additional debt to your capital structure may decrease your share price True False An industry leader is more likely to have amore stable earnings pattern and therefore have less debt capacity than other companies in the industry True False When comparing your firm to a competitor, it is important to evaluate differences in systematic risk (assuming there are some) True False Many companies rely on investment bankers to judge the market response because they generally have a good understanding of the bond rating process and continual contact with security analysts True False Tax changes combined with transaction cost may cause the market to be in disequalibrium True False When conducting a pro forma analysis, it is necessary to only predict the income statement to calculate the projected financing needs of the organization True False The holding of reserves, and the sale of assets are two available resources that may offset negative cash flow True False Nonfinancial items should not be considered when determining the optimal financial structure True False The lessee uses the assets while the lessor owns the asset True False Beta measures diversifiable or nonsystematic risk True False The IRS has guidelines for determining if a lease is really an installment sale True False The ability to shift the risk of obsolescence, serviceability and residual value to the lessee is typical True False Leases are often used by companies to remove the cost of assets and the corresponding debt from the balance sheet True False Typically, government reimbursement techniques favor ownership over leasing 48 True False Vertical integration may involve buying either a customer or a supplier True False Horizontal integration involves the purchase of an unrelated business True False Information asymmetry could exist where an acquiring firm has a better information set than the market in general True False An acquisition is often easier than a proxy battle, but with an acquisition the acquirer must share a greater proportion of the benefits of any value creation True False The correlation of compensation with the size of an organization is one reason managers might do merger even if it decreases the wealth of the acquiring companies True False Hostile take over attempts are hostile to the target shareholders but friendly to the target's management True False Ignoring taxes if you do not believe the synergistic benefits will occur, you should push for a stock for stock merger

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1.True - False While there have long been attempts to reduce risk to concrete measures, we are not yet to the point where any one

1.True - False While there have long been attempts to reduce risk to concrete measures, we are not yet to the point where any one measure adequately describes risk in every situation.

2.True - False Despite the development of more sophisticated approaches, sensitivity analysis and break even analysis continue to be useful tools.

3.True - False The expected value is a commonly used measure of dispersion.

4.True - False The standard deviation is expressed in squared units but the variance is expressed in the same units as the observations.

5.True - False The standard deviation can combine hundreds of possible outcomes in a single risk statistic.

6.True - False The coefficient of variation is calculated by dividing the standard deviation by the expected value.

7.True - False Utility theory is a very useful tool and many corporations are spending many dollars mapping the utility functions of senior level executives and stockholders.

8.True - False Most senior executives are risk averse, meaning they will seek risk only if they expect to be compensated for it.

9.True - False The choice of risk perspective has little influence the choice of the risk measurement statistic.

10.True - False Sensitivity analysis changes multiple variables at one time, while scenario analysis changes just one variable at a time.

11.True - False Income breakeven analysis usually results in a higher breakeven point than NPV breakeven.

12.True - FalseExpected net present values are calculated by multiplying the possible NPV's by the probabilities and then adding these solutions.

13.True - FalseDecision trees are gaining in popularity because they identify embedded options and they force managers to do contingency planning.

14.True - False History, expert opinion, and government mandatesare three methods for developing probability estimates.

15.True - False Sequential investing is a way to measure risk not a way to manage risk.

16. True - False The weighted average cost of existing capital is the change in the total returns needed to satisfy investors in light of new investment, divided by the amount of capital needed for the investment.

True - False The rate paid on the funds raised by the corporation and then used for a new capital investment is the appropriate discount rate for you to use in capital budgeting regardless of the risk of the project.

True - False A new investment should not be justified by the benefits of moving to an optimal capital structure.The benefit of moving to an optimal capital structure can be had by raising more of one type of capital and using the proceeds to retire another, without making new investments.

True - False Flotation costs are the costs associated with retiring an old issue of debt or equity, such as the fees paid to investment bankers for handling the sale.

True - False When calculating the cost of preferred stock, we need not adjust for taxes because dividends do not result in a decrease in the company's income tax.

True - False The mean-variance capital asset pricing model approach differs from the constant growth dividend valuation model and the earnings yield model in that it focuses on market returns for investments of similar risk rather than on investor response to a particular security.

True - False If markets are perfectly efficient, the market values of debt and equity will equal present values of the expected cash flows for each of these sources of funding.

True - False For capital budgeting, we use projected cash flows, not income statement numbers so deferred taxes are a major source of funding and needs to be considered in calculating the weighted average cost of capital.

True - False When short-term debt is used as permanent financing and it is clearly part of the company's permanent capital in substance, then it should be treated like other long-term debt in cost of capital analysis.

True - False Accounts payable and accrued expenses are a major source of funding that have explicit cost and therefore need to be considered in calculating the weighted average cost of capital .

True - False In the absence of market imperfections, the capital structure that maximizes the value of the firm will also be the capital structure that minimized the weighted average cost of capital.

True - False In reality (not a perfect market) risk, firm value, and the attractiveness of capital investments will likely be affected by capital structure decisions.

True - False The agency cost of equity is highest in an all-debt firm.

True - False Spin-off cost is an important deterrent to using too much debt.

True - False Capital structure can be part of a system designed to assure that managers maximize their own wealth by acting in the interest of the shareholders.

True - False Expected bankruptcy costs decrease as the amount of debt increases.

True - False Bankruptcy by itself does not decrease the value of the firm; however, the friction cost associated with bankruptcy does decrease wealth.

True - False Information asymmetries are more likely to occur when the company is changing its strategy.

True - False If a competitor (more heavily leveraged than your company) experiences a positive response to an increase in leverage, this suggests that additional debt to your capital structure may decrease your share price.

True - False An industry leader is more likely to have amore stable earnings pattern and therefore have less debt capacity than other companies in the industry.

True - False When comparing your firm to a competitor, it is important to evaluate differences in systematic risk (assuming there are some).

True - False Many companies rely on investment bankers to judge the market response because they generally have a good understanding of the bond rating process and continual contact with security analysts.

True - False Tax changes combined with transaction cost may cause the market to be in disequalibrium.

True - False When conducting a pro-forma analysis, it is necessary to only predict the income statement to calculate the projected financing needs of the organization.

True - False The holding of reserves, and the sale of assets are two available resources that may offset negative cash flow.

True - False Nonfinancial items should not be considered when determining the optimal financial structure.

True - False The lessee uses the assets while the lessor owns the asset.

True - False Beta measures diversifiable or nonsystematic risk.

True - False The IRS has guidelines for determining if a lease is really an installment sale

True - False The ability to shift the risk of obsolescence, serviceability and residual value to the lessee is typical.

True - False Leases are often used by companies to remove the cost of assets and the corresponding debt from the balance sheet.

True - False Typically, government reimbursement techniques favor ownership over leasing.

48.True - False Vertical integration may involve buying either a customer or a supplier.

True - False Horizontal integration involves the purchase of an unrelated business.

True - False Information asymmetry could exist where an acquiring firm has a better information set than the market in general.

True - False An acquisition is often easier than a proxy battle, but with an acquisition the acquirer must share a greater proportion of the benefits of any value creation.

True - False The correlation of compensation with the size of an organization is one reason managers might "do merger" even if it decreases the wealth of the acquiring companies.