In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock's market price.
EBIT stands for earnings before interest and taxes, and it is often called "non-operating income".
the risk that interest rates will decrease is called reinvestment risk, which is a risk for those who invest in short-term assets.
The corporate valuation model can be used only when a company doesn't pay dividends.
When developing forecasted financial statements, some inputs are not under the managements control such as the accounts receivable.
Last year, Comp Industries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?
| | The company made a large capital investment early in the year. |
| | The company had a sharp increase in depreciation expenses. |
| | The company had a sharp increase in its inventories. |
| | The company sold a new issue of common stock. |
| | The company had a sharp increase in its accrued liabilities. |
You observe that a firms ROE is above the industry average, but its profit margin and total asset turnover are both below the industry average. Which of the following statements is CORRECT?
| | Its return on assets must equal the industry average. |
| | Its debt ratio must be equal to the industry average. |
| | Its debt ratio must be below the industry average. |
| | Its TIE ratio must be below the industry average. |
| | Its debt ratio must be above the industry average. |
Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?
| | 5-year, zero coupon bond. |
| | 10-year, 10% coupon bond. |
| | 10-year, zero coupon bond. |
LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?
| | Project C, which is of above-average risk and has a return of 11%. |
| | Project B, which is of average risk and has a return of 9.5%. |
| | Project A, which is of below-average risk and has a return of 7.5%. |
| | All of the projects should be accepted. |
| | None of the projects should be accepted. |
Based on the information below, what is the firm's optimal capital structure?
| | Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.80. |
| | Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $30.40. |
| | Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $31.20. |
| | Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90. |
| | Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50. |
