Question 1

1. If a retired individual lives on his or her investment income, then it would make sense for this person to prefer stocks with high payouts so he or she could receive cash without going to the trouble and expense of selling stocks. On the other hand, it would make sense for an individual who would just reinvest any dividends received to prefer a low-payout company because that would save him or her taxes and brokerage costs.

   True

   False

1 points

Question 2

1. Which of the following statements is CORRECT?

   	a.	Increasing a company's debt ratio will typically increase the marginal costs of both debt and equity financing. However, this action still may lower the company's WACC.
   	b.	Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its WACC.
   	c.	Since a firm's beta coefficient is not affected by its use of financial leverage, leverage does not affect the cost of equity.
   	d.	Since debt financing raises the firm's financial risk, increasing the target debt ratio will always increase the WACC.
   	e.	Increasing a company's debt ratio will typically reduce the marginal costs of both debt and equity financing. However, this action still may raise the company's WACC.

1 points

Question 3

1. The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock, other things held constant.

   True

   False

1 points

Question 4

1. If a firm declares a 20:1 stock split, and the pre-split price was $500, then we might expect the post-split price to be $25. However, it often turns out that the post-split price will be higher than $25. This higher price could be due to signaling effects investors believe that management split the stock because they think the firm is going to do better in the future. The higher price could also be because investors like lower-priced shares.

   True

   False

1 points

Question 5

1. Which of the following statements is CORRECT?

   	a.	The capital structure that minimizes the required return on equity also maximizes the stock price.
   	b.	The capital structure that maximizes expected EPS also maximizes the price per share of common stock.
   	c.	The capital structure that gives the firm the best bond rating also maximizes the stock price.
   	d.	The capital structure that minimizes the interest rate on debt also maximizes the expected EPS.
   	e.	The capital structure that minimizes the WACC also maximizes the price per share of common stock.

1 points

Question 6

1. Your uncle is considering investing in a new company that will produce high quality stereo speakers. The sales price would be set at 1.70 times the variable cost per unit; the variable cost per unit is estimated to be $75.00; and fixed costs are estimated at $1,170,000. What sales volume would be required to break even, i.e., to have EBIT = zero?

   	a.	25,851
   	b.	18,051
   	c.	23,400
   	d.	17,160
   	e.	22,286