Preem A

Debt overhang occurs when: 1. A company is so indebted that it has little incentive to invest as all the cash flows generated by investments are expected to be appropriated by creditors 2. A company has plenty of free cash flows but few investment opportunities 3. A company issues debt to pay dividends to its shareholders 4. A company carries excessive debt, so that it has the incentive to invest in high risk projects at the expense of creditors

Minimizing liquidity is an excellent way to meet a company's short-term financial obligations. 1) False 2) True

Which of the following statements is FALSE? As debt increases, the risk associated with bankruptcy and agency costs is reduced.   Debt is often the least costly form of financing for a firm. Firms should probably use some debt in their capital structure. Different firms are subject to different levels of risk.

An analyst at a company notes that its cost of debt is far below that of equity. He concludes that it is important for the firm to maintain the ability to increase its borrowing because if it cannot borrow, it will be forced to use more expensive equity to finance some projects. This might lead it to reject some projects that would have seemed attractive if evaluated at the lower cost of debt.    How do you balance the amount of equity and debt? Explain the significance of maintaining the ability to increase borrowing capacity for a company with a lower cost of debt compared to equity. How does this impact project evaluation and investment decisions, and what role does the concept of cost of capital play in such considerations?

Financial slack is the amount of unused access to debt markets or bank financing. Which theory of capital structure would place the highest value on maintaining financial slack for a firm that is not in financial distress?   Question 10 options:   a)  Trade-off theory   b)  Debt financing as a managerial constraint   c)  Pecking order theory   d)  Modigliani & Miller irrelevance theory

Which of the following is not a factor that can provide financial instability? a. Decreases in interest rate b. Increase in uncertainty c. Negative shocks to firms’ balance sheets d. A deterioration in FI’s balance sheets

Identify the incorrect statement below; Group of answer choices “Too much inventory can lead to increased risk of pilferage and obsolescence”. “Non-current assets are a part of working capital”. “If a firm has too big a cash balance, it should consider repaying some or all of it to its shareholders”. “Too high a figure of receivables might indicate poor credit control”.

4. Which of the following is false about the risk-shifting problem? Risk-shifting leads to a transfer of value from debt-holders to equity holders Risk-shifting leads prospective lenders to pay less for debt and require higher interest payments Risk-shifting arises when shareholders choose negative NPV projects with higher risk Risk-shifting is an example of an agency cost of debt Risk-shifting is greater in firms with low leverage

Which of the following is true regarding a company assuming more debt?   Select one: a. Assuming more debt is always bad for the company b. Assuming more debt reduces leverage c. Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds d. Assuming more debt is always good for the company

Which statement is most correct? *     A. Since debt financing raises the firm’s financial risk, increasing debt ratio will increase WACC.   B. Since debt financing is cheaper than equity financing, increasing debt ratio will reduce WACC.   C. Increasing a firm’s debt ratio will typically reduce the marginal costs of both debt and equity financing; however, it still may raise the firm’s WACC.   D. Statements a and c are correct.   E. None of the above

TRUE OR FALSE 1. Short-term financial policies that are flexible with regard to current assets includes keeping large balance of short-term debt. 2. Costs that fall with increases in the level of investment in current assets are called shortage costs. 3. The firm further increases the effective interest rate earned by the bank on the committed line of credit.

Which of the following is NOT related to (or contributes to) business risk? Remember that a company's activities have an effect on its business risk. Sales price variability. The extent to which operating costs are fixed. Demand variability. O Input price variability. O The extent to which interest rates on the firm's debt fluctuate.

Which of the following statements is NOT CORRECT?  A. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing   B. A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year   C. The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans.   D. If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10, net 30 to net 60.

Which of the following statement is false?   a. None of above b. The capital structure should be flexible. c. A firm having operating loss would find it worthwhile to incorporate debt in the capital structure in a greater measure. d. The use of excessive debt threatens the solvency of the company.

Which of the following statements is false?   A. Credit spreads narrow during an economic recession. B.   Credit spreads tend to narrow as broker-dealers become more willing to provide capital.   C.   Less creditworthy issuers are subject to high market liquidity risk.   D.   None of the above.

Which of the following is incorrect about the Pecking Order Theory? A.Firms with high ratios of fixed assets to total assets tend to have higher debt ratios.This evidence exclusively supports the pecking order theory B.When external finance is required,firms issue debt first and equity as a last resort C.Most profitable firms borrow less not because they have lower target debt ratios but beause they don't need external finance D.Firms prefer internal finance since funds can be raised without sending adverse signals

Suppose you believe that the economy is just entering a recession. Your firm must raisecapital immediately, and debt will be used. Should you borrow on a long-term or a shorttermbasis? Why?

Regarding the EPS fallacy, which of the following statements is correct: a. When a company issues debt and uses all the proceeds to buy back equity and as a result EPS rises, the fact that some analysts associate the rise of EPS to an improvement in the company's performance is called the EPS fallacy. b. All given statements are correct. c. One of the reasons behind the EPS fallacy is not to take into account that when EPS rises mechanically due to a leveraged recapitalisation, the cost of equity also rises in the same proportion and the share price does not change (assume no taxes and perfect capital markets world). d. Suppose companies A and B have identical cash flows but different capital structures. Suppose further that EPS(A) > EPS(B). We cannot conclude that A has a better performance than B.

Which of the following statements is correct? A firm has a greater likelihood of needing an unexpected loan when its cash flows are relatively constant over time. The cost of borrowing affects the target cash balance of a firm. Management's desire to maintain a low cash balance has no effect on the borrowing needs of a firm. The target cash balance increases as the interest rate rises. The target cash balance decreases as the order costs increase.