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 E

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 E

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter5: Risk Analysis

Section: Chapter Questions

Problem 2QE

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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 total invested capital.
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 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
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.
Choose the correct. Which of the following is not included in the assumption on which Myron Gorden proposed a model on Stock valuation: A. Retained earning the only source of financing B. Finite Life of the firm C. Taxes do not exist D. Constant rate of return on firms investment.
Which of the following about optimal capital structure is incorrect? Optimal capital structure is the mixed of debt and equity capital that minimizes the firm’s weighted average cost of capital A company that follows the pecking order theory will use external financing thru debt after exhausting all the possible financing thru equity The management empire-building theory views high interest payments as to prevent management from unreasonable spending A company can take advantage of its high corporate tax rate as tax shield, under the trade-off theory
Company PL and company NL are identical except PL has positive financial leverage whereas NL has negative financial leverage. Which of the following are true? You can select more than one. PL’s return on invested capital (ROIC) is more volatile than NL’s ROIC. PL’s return on equity (ROE) is more volatile than NL’s ROE. PL’s ROIC and NL’s ROIC are equally volatile. PL’s ROE and NL’s ROE are equally volatile. PL’s return on invested capital (ROIC) is less volatile than NL’s ROIC. PL’s return on equity (ROE) is less volatile than NL’s ROE
Would a firm that has many good investment opportunities be likely to have ahigher or a lower dividend payout ratio than a firm with few good investment opportunities?Explain.
Which of the following statements are true and which are false? o). High breakeven points in capital intensive industries are desirable. p). The fixed return on borrowed capital (i.e., interest) is more risky than profits paid to equity investors (i.e., stockholders) in a firm.
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 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.
A company should accept for investment all positive NPV investment alternatives when which of the following conditions is true?a. The company has extremely limited resources for capital investment.b. The company has excess cash on its balance sheet.c. The company has virtually unlimited resources for capital investment.d. The company has limited resources for capital investment but is planning to issue new equity to finance additional capital investment.