A high capital gearing ratio indicates [A] under capitalization [B] over capitalization [C] borrowed capital [D] long term funds
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A high capital gearing ratio indicates
- [A] under capitalization
- [B] over capitalization
- [C] borrowed capital
- [D] long term funds
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- The cost of capital used in capital budgeting should reflect the average cost of the various sources of short-term funds a firm uses to acquire assets. True FalseWhich of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting? a. Accounts payable. b. Preferred stock. c. Common stock raised by new issues. d. Long-term debt. e. Common stock "raised" by reinvesting earnings.a. Provide a brief overview of capital structure effects. Be sure to identify the ways in which capital structure can affect the weighted average cost of capital and free cash flows.
- Define each of the following terms:a. Capital; capital structure; optimal capital structureb. Business risk; financial riskc. Financial leverage; operating leverage; operating breakevend. Hamada equation; unlevered betae. Symmetric information; asymmetric informationf. Modigliani-Miller theoriesg. Trade-off theory; signaling theoryh. Reserve borrowing capacity; pecking orderi. Windows of opportunity; net debtWhich of the following statements are correct? Preferred equities are separate form common equities Opportunity cost should not be included in the capital budgeting decision Retained earnings are important in calculating the WACC Weights for equity in the WACC calculation are always on book values Cash from net working capital for each year is defined as NWCn- NWCn-1When discounting Free Cash Flow to Firm (FCFF), should the Weighted Average Cost of Capital (WACC) be pre-tax or post-tax?
- Profitability index. It is a ratio that provides information about the present value of net cash flows to the net investment. It provides a measure of the relative present value return for each dollar of initial investment. Discuss its usefulness. Should managers rely upon it? Consider its usefulness in a capital rationing situation (capital investment under conditions of financial restraint).Using the free cash flow valuation model, identify avenues by which capital structure can affect the weighted average cost of capital and firm value.Determining optimum capital structure is a. An investment decision b. A financing decision c. A dividend decision d. liquidity decision
- In capital budgeting analysis, when computing the weighted average cost of capital, the CAPM approach is typically used to find the component cost of which type of capital? Internal equity. Preference shares. All of these.Under the capital maintenance concept, which of the following items should be deducted from the increase or decrease in capital? a. Losses on hedging instruments in a cash flow hedge. b. Increase in revaluation surplus. c. Actuarial loss on remeasurement on defined benefit liability. d. Reacquisition of treasury shares.NPV measures a. the change in firm value b. the profitability of an investment c. the change in wealth d. the present value of the future net cash flows from the investment e. all of the above
