1. What is the most correct implication of the additional funds needs (AFN)?

If AFN is negative, then you must secure additional financing.

If AFN is negative, then you have extra funds to pay off debt.

If AFN is positive, then you have extra funds for short-term investments.

If AFN is negative, then you must issue additional new stock.

Which of the following statements does NOT correctly explain the effect of additional debt on the weighted average cost of capital (WACC)?

Debtholders' prior and "fixed" claim increases the risk of stockholders' "residual" claim, so the cost of stock (r_s) goes up.

Additional debt also increases the pre-tax of cost of debt (r_d) because the increased risk of bankruptcy.

The net effect of additional debt on WACC is to increase WACC.

The net effect of additional debt on WACC is uncertain.

Question 3

If Miller and Modigliani had incorporated the costs of bankruptcy into their model, it is unlikely that they would have concluded that 100% debt financing is optimal..

True

False

Question 4

Debt financing can help prevent managers from using excess cash on perquisites.

Debt financing may make managers too risk-averse, therefore causing "underinvestment" in some risky but positive NPV projects.

Debt financing can encourage managers from using excess cash on non-value adding acquisitions.

How does debt financing help reduce agency problems which arise when managers and shareholders have different objectives?

Question 5

8,000 books.

10,000 books.

20,000 books.

40,000 books.

A bookstore sells paperback books for $10 each.The variable cost per book is $7.The fixed costs are $30,000. What's the publisher's breaking- even sales volume?

Question 6

If the information content, or signaling, hypothesis is correct, changes in dividend policy can be important because investors view dividend changes as signals of management's view of the future.

True

False

Question 7

You will have 1,000 shares of stock with $100 a share.

You will have 1,000 shares of stock with $20 a share.

You will have 5,000 shares of stock with $100 a share.

You will have 5,000 shares of stock with $20 a share.

You currently own 1,000 shares of stock in Beverly Brothers Inc.The stock currently trades at $100 a share.The company is contemplating a 5-for-1 stock split.Which of the following best describes your position after the proposed stock split takes place?

Question 8

Based on the residual dividend policy, if company has better operating performance with a higher net income, it has less cash which can be distributed to common shareholders given the same capital budget.

True

False

Question 9

Firms hold transaction cash for routine payments and collections.

Firms reserve precautionary cash for random and unforeseen fluctuations in cash flows.

Firms hold cash to take advantage of bargains, discounts, etc.

All of the statements above are correct.

Which of the following statements correctly describe the reasons why firms hold cash even though cash doesn't earn interests?

Question 10

The principal goal of inventory management systems is to balance the costs of ordering, shipping, and receiving goods with the cost of carrying those goods, while simultaneously meeting the firm's policy with respect to avoiding running short of stock and disrupting production schedules.

True

False