Which of the following statements is CORRECT? a. One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free. b. Actions that increase reported net income will always increase cash flow. c. One way to increase EVA is to achieve the same level of operating income but with more total invested capital obtained at a higher cost of capital. d. If a firm reports positive net income, its EVA must also be positive. e. One way to increase EVA is to generate the same level of operating income but with less

Which of the following statements is CORRECT? a. One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free. b. Actions that increase reported net income will always increase cash flow. c. One way to increase EVA is to achieve the same level of operating income but with more total invested capital obtained at a higher cost of capital. d. If a firm reports positive net income, its EVA must also be positive. e. One way to increase EVA is to generate the same level of operating income but with less

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 2Q: Modigliani and Miller assumed that firms do not grow. How does positive growth change their...

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Which of the following statements regarding EVA is NOT CORRECT? Group of answer choices: EVA assumes that equity capital is not free. A firm’s EVA will increase if it achieves the same operating income with less investor-supplied capital. As long as a firm's ROIC is positive, its EVA will be positive. If a firm reports positive net income, its EVA will also be positive. Actions that increase reported net income may not always increase EVA.
Which of the following statements is most correct?(a) Generally, firms with high profit margins have high asset turnover ratios.(b) Having a high current ratio and a high quick ratio is always a good indication a firm is managing its liquidity position well.(c) Knowing that return on assets {ROA) measures the firm's effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.(d) One way to improve the current ratio is to use cash to pay off currentliabilities.
Which of the following is a criticism of a policy of maximizing the firm’s return on equity (ROE)? ROE is based on after-tax earnings, not cash flows. ROE does not consider risk. ROE ignores the size of the initial investment as well as future cash flows. All of these are criticisms of ROE as a goal.
Which of the following is NOT a conclusion drawn from M&M's Propositions 1 and 2? a. Shareholder's required return rises with leverage. b. The WACC does not change as capital structure change. c. Firm value is determined by the left hand of the balance sheet the firm's assets, and the cash flow generated by them. d. The WACC is determined by the riskiness of the company's business (assets). e. A firm can change its market value by splitting its cash flows into different streams.
Which of the following statements is correct? A. If a firm’s assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm’s AFN to be negative. B. AFN is not always positive. C. If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm’s actual AFN must, mathematically, exceed the previously calculated AFN. D. Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio. E. Dividend policy does not affect the requirement for external funds based on the AFN equation.
Which of the following does NOT always increase a company’s MVA? Group of answer choices: Increasing the expected growth rate of sales Decreasing the capital requirements (Capital/Sales) Decreasing the weighted average cost of capital Increasing the expected operating profitability (NOPAT/Sales) Increasing the expected rate of return on invested capital
Which of the following statements is true? The cost of retained earnings have the lowest weight in computation of the weighted average cost of capital since no flotation cost is involved One of the advantage to a firm of being near its target capital structure is that its financial flexibility becomes much less important. Those Industry characteristics that are considered risky in nature and may affect a company’s business risk are still subjected to a certain degree of managerial control. The capital structure that maximizes the firm’s stock price is also the one that increases the firm’s weighted average cost of capital at a maximum rate
Which of the following statements is false regarding the abnormal earnings approach to valuation? Multiple Choice The method uses earnings and equity book value numbers as direct inputs in the valuation process. The method uses the cost of capital as a fundamental economic benchmark. This approach produces results that are generally equivalent to the free cash flow model. This approach is based on the notion that the value of a company is driven primarily by the level of earnings.
A firm that is increasing its capital structure leverage and increasing profitability will likely experience a (an) a. increasing value-to-book ratio b. decreasing return on assets c. volatile price-earnings ratio d. None of these answer choices are correct.
Which of the following statements is false? A. Net incomes are not cash flows. Financial Managers should focus on the cash flows when making capital budgeting decisions. B. Incremental earnings are the amount by which the firm's earnings are expected to change as a result of the investment decision. C. To the extend that overhead costs are fixed and will be incurred in any case, they are not incremental to the project and should be excluded in the capital budgeting analysis. D. Depreciation is not a cash expense paid by the firm. E. None of the above.
Which of the following is a valid reason for a firm not to use as much debt as it can raise? Group of answer choices The use of more debt is expected to result in an increase in the firmʹs cost of capital when everything is considered More debt will increase the firmʹs riskiness All of them are valid reasons for a firm to use less debt than might be available The use of more debt is expected to result in a lower price/earnings ratio
Companies that face large investments they cannot finance internally through the retention of earnings must go to the financial market to raise the needed funds. When they do this, they will incur what are commonly referred to as floatation costs. Discuss how these floatation costs should be incorporated into the firm’s analysis of net present value