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- One position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investments. Explain what a residual policy implies (assuming that all distributions are in the form of dividends), illustrating your answer with a table showing how different investment opportunities could lead to different dividend payout ratios.Which of the following statements is correct?(a) The quickest way to determine whether the firmhas too much debt is to calculate the Timesinterest-earned ratio.(b) The best rule of thumb for determining the firm’sliquidity is to calculate the current ratio.(c) From an investor’s point of view, the price-toearnings ratio is a good indicator of whether ornot a firm is generating an acceptable return tothe investor.(d) The operating margin is determined by subtracting all operating and non-operating expensesfrom the gross margin.Using the value-to-book version of the residual income valuation approach, the value-to-book ratio is determined as a. one plus the present value of future residual ROCE. b. one plus the present value of future comprehensive income divided by book value of common equity. c. book value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital. d. market value of common equity plus the present value of expected future residual income. A firm's value-to-book ratio might be greater than 1.0 due to fundamental reasons. An example of a fundamental reason that would cause the value-to-book ratio to increase is a. creating growth in profitable operations that generate ROCE that exceeds RE. b. increasing risk. c. being profitable. d. growth in shareholders' equity by issuing stock.
- Which is easier to calculate directly, the expected rate of return on the assets of a firm or the expected rate of return on the firm’s debt and equity?WHICH OF THE FOLLOWING STATEMENTS IS MOST CORRECT? A. IF A FIRM'S EXPECTED BASIC EARNING POWER (BEP) IS CONSTANT FOR ALL ITS ASSETS AND EXCEES INTEREST RATE ON ITS DEBT, THEN ADDING ASSETS FINANCING THEM WITH DEBT WILL RAISE THE FIRM'S EXPECTED RATE OF RETURN ON COMMON EQUITY (ROE)? B. THE HIGHER ITS TAX RATE, THE LOWER A FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. C. THE HIGHER THE INTEREST RATE ON ITS DEBT, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. D. THE HIGHER ITS DEBT RATIO, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. E. STATEMENT A IS FALSE, BUT B, C AND D ARE ALL TRUE.Which of the below statements does the MM Proposition I predict? A. In a perfect market, the value of a firm is independent of its capital structure B.In a perfect market, the discount rate depends on the capital structure C.In a perfect market, the value of a firm decreases in leverage D.In a perfect market, the NPY of investments depends on the existing debt/equity mix
- Which of the following is the best representation of a firm’s effective cost of debt financing? Group of answer choices Current yield Coupon rate Yield to maturityAssume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity? How should the capital structure weights are used to calculate the WACC be determined?From the scenario, determine the Market value of the firm's equity, the market value of the firm's debt, the cost of equity (required rate of return), cost of debt (yield to maturity on existing debt) and the corporate tax rate.
- Is the debt level that maximizes a firm’s expected EPS the same as the debt level that maximizesits stock price? Explain.Which of the following statements are CORRECT? Check all that apply: The aftertax cost of debt decreases when the market price of a bond increases. A decrease in a firm's WACC will increase the attractiveness of the firm's investment options. Cost of capital is also known as the minimum expected or required return an investment must offer to be attractive.(1) Why do analysts need to consider different factorswhen evaluating a company’s ability to repay shortterm versus long-term debt? (2) Would the currentamount of the owners’ equity be a reasonable price topay for a company? Why or why not?
