Question

23. Capital structure decisions refer to the: A. dividend yield of the firm's stock B. blend of equity and debe used by the fim C. capital gains available on the firms stock D. maturity date for the firm's securities 24. If the line measuring a stock's historic returns against the market's historic returns has a slope greater than 1.0, then the: A. stock is currently underpriced B, market risk peemium is increasing. C. stock has a significant amount of unique risk D. stoek has a beta exceeding 1.0 25. When a project's internal rate of return equals its opportunity cost of capital, then the: A. projoct should be rejected B. project has no cash inflows. С.net present value will be posative D. net present valuc will be zero. 26. To calculate the present value of a business, the firm's free cash flows should be discounted at the firm's: A. weightod-average of capital B. pre-tax cost of debt C. aftertax cost of debe D. cost of equity 27. Firms that make investment decisions based on the payback rule may be biased toward rejecting projects: A. with short lives B, with kong lives. C. with late cash inflows. D. that have negative NPVs. 28. Stock returns can be explained by the stock's stock's and the A. beta; unique risk B, beta; market risk C. unique risk; firm-specific risk D. aggressive risk; defensive risk 29. When will ROE (Return on equity) equal ROC (Return on capital)? A. Whenever the firm has oqual debt and oquity financing B. Whenever the firm has no interest payments on debt C. whenever the value of the firm's assets exceeds the value of its equity D. ROE will never oqual ROC

Answer 1

23) B

Capital structure decision refers to how to finance the business.Determine source of financing & quantum of equity and debt to be used in business.

24) D

Slope of line refers to beta of stock .If slope exceed 1 it mean beta of stock exceed 1.

25) D

If IRR of project exceed or equal to cost of capital only then project is accepted.If It equal to cost it means net present will be zero.

26) A

To calculate net present value discount rate used is weighted average cost of capital.If company has debt then weighted average of cost of equity and cost of debt is used.

27) C

In Payback rule , project with higher payback period is rejected.Cash flow beyond payback period is ignored.

28) B

Stock return is explained by stock 's beta and market risk.

stock return = risk free return + beta * market risk premium

29) B

ROE and ROC equal when no interest payment on debt.ROE is return on equity and ROC is return on capital .

If firm has debt , then ROE and ROC are different because ROC consider debt and equity both.