Financial Management

151. In determining the appropriate capital mix, the starting point for the firm is:

  1. the cost of common equity
  2. the optimum capital structure
  3. the present capital structure
  4. the after-tax cost of debt
Correct answer: (C)
the present capital structure

152. In most capital budgeting decisions, the emphasis is on:

  1. reported income
  2. cash flows
  3. short-term profits
  4. maximization of shareholder wealth
Correct answer: (B)
cash flows

153. The basic discount rate used in net present value analysis is:

  1. the internal rate of return
  2. the cost of common equity
  3. the net discount rate
  4. the cost of capital to the firm
Correct answer: (D)
the cost of capital to the firm

154. In a replacement decision, all of the following should be considered except:

  1. the cost of the new equipment
  2. interest costs
  3. the capital loss or gain on the sale of the old equipment
  4. the difference in capital cost allowance tax shields between the old and new equipment
Correct answer: (B)
interest costs

155. All of the following are true regarding beta except:

  1. it is widely used with portfolios of common stock
  2. it measures the volatility of returns relative to the expected value
  3. it is an important component of the Capital Asset Pricing Model (CAPM)
  4. the higher the beta, the greater the risk level
Correct answer: (B)
it measures the volatility of returns relative to the expected value

156. A decision tree analysis:

  1. lays out the sequence of decisions and presents a graphical comparison
  2. is a form of simulation analysis
  3. tends to be more accurate than simulation techniques
  4. should be utilized as the sole input for the decision making process
Correct answer: (A)
lays out the sequence of decisions and presents a graphical comparison

157. Markets comprised of securities with maturities greater than one year are generally referred to as:

  1. money markets
  2. capital markets
  3. stock markets
  4. bond market
Correct answer: (B)
capital markets

158. Markets may be said to be efficient when:

  1. prices adjust rapidly to new information
  2. there is a continuous market with successive trade at widely varying prices
  3. the market absorbs only small dollar amounts without destabilizing prices
  4. all of the above are correct
Correct answer: (D)
all of the above are correct

159. The main organization used in distributing securities is:

  1. the stock market
  2. the underwriting syndicate
  3. the primary market
  4. the secondary market
Correct answer: (B)
the underwriting syndicate

160. The major problem when a public firm issues new stock is:

  1. pricing the security
  2. underwriting the issue
  3. determining the spread
  4. the dilution of existing stock
Correct answer: (D)
the dilution of existing stock
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