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Question
The weighted average cost of capital (WACC) declines as more of the lowest cost component is added. What limits a firm from using nearly all debt is that as the debt-to-assets ratio rises, the absolute interest expense gets very large. The large interest expense reduces income and results in a debt-to-assets ratio limit even though the WACC continues to decline.
a. True
b. False
Answer
This answer is hidden. It contains 5 characters.
Related questions
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Because an investor borrowing funds for margin trading pays a fixed rate to borrow funds from his broker, the margin trading returns are magnifies the returns on the assets value.
a. True
b. False
Q:
Discount brokers can offer trades at lower commissions than full service brokers because they require all of their clients to trade electronically rather than through a broker.
a. True
b. False
Q:
When an investor trades on margin, he or she borrows from the broker some of the funds needed to purchase securities.
a. True
b. False
Q:
Once realistic goals have been formulated based on investment objectives and risk attitudes, the costs associated with the selection and purchase of the investment instruments is minimal.
a. True
b. False
Q:
The Securities Investor Protection Corporation insures the cash and securities held by the brokerage company from theft or loss of the security. Each investor is covered to a maximum of ____.
a. $100,000
b. $200,000
c. $500,000
d. $1,000,000
Q:
Refer to Foxy Ladies Investment Club. What was the portfolio's geometric average return per year from 2010 through 2012?
a. 20.0%
b. 21.8%
c. 68.3%
d. 18.9%
e. Not enough information is given to compute the geometric average return.
Q:
Refer to Foxy Ladies Investment Club. What was the portfolio's simple arithmetic average return per year from 2010 through 2012?
a. 20.0%
b. 21.8%
c. 68.3%
d. 18.9%
e. Not enough information is given to compute the simple arithmetic average return.
Q:
The one-year holding period returns for Cherokee Adventures for 2010 and 2011 are given below. If Cherokee's geometric average return for 2010 through 2012 was 15 percent, what was its implied one-year holding period return for 2012? Year 1-year holding
period return 2010 −5.0% 2011 28.5 2012 ? a. 12.8% b. 11.8% c. 24.6% d. 16.0% e. Not enough information is given to answer this question.
Q:
The simple arithmetic average return for the common stock of Saltwater Expeditions Incorporated for the eight-year period from 2005 through 2012 was 21 percent. The one-year holding period returns from 2005 through 2011 are given below. What is the implied one-year holding period return for 2012?
Year 1-year holding
period return
2005 17%
2006 22
2007 25
2008 20
2009 38
2010 25
2011 24
2012 ?
a. 21.4%
b. 24.4%
c. 3.0%
d. 13.0%
e. u22123.0%
Q:
An investor earned a holding period return equal to 10 percent on a stock that she purchased for $27.50. During the time she held the stock, the company paid a $2 dividend. For what price did the investor sell the stock?
a. $26.75
b. $26.25
c. $30.25
d. $29.50
e. $28.25
Q:
A stock purchased for $52 paid a dividend of $1 six days after it was purchased. The stock was sold for $51 ninety days after it was purchased. What is the annualized rate of return? Assume the dividend was not reinvested.
a. 3.9%
b. 0.0%
c. u22127.7%
d. 15.7%
e. u221215.7%
Q:
The economic value added (EVA) valuation method might be the most attractive valuation method because it does not require estimation of unknown factors and it ties the value creation process to changes in a firm's capital structure and changes in a firm's efficiency.
a. True
b. False
Q:
Technical analysts essentially believe "history repeats itself" because investors behave in a predictable manner when faced with situations they have faced in the past.
a. True
b. False
Q:
Because financial statement analysis is based on examination of accounting statements, which often do not represent economic earnings, they should not be included in investment analysis.
a. True
b. False
Q:
The dividend discount model (DDM) can only be used to value a company's stock if it is expected that the company will pay a dividend that grows at a constant rate in the future.
a. True
b. False
Q:
Industries that are comprised of companies that tend to be directly related to business cycles are generally referred to as cyclical industries.
a. True
b. False
Q:
Use the information below to solve for the earnings per share for Adobe.
52 Weeks Yld Vol Net
Hi Lo Stock Sym % PE 100s Hi Lo Close Chg
743/837 Adobe ADBE ? 17 4230 5611/16525/8557/8+33/16
a. $4.38
b. $2.18
c. $3.29
d. $3.10
e. None of the above.
Q:
Income securities are used primarily to
a. Invest in retirement planning.
b. Supplement current income.
c. Shelter current income from taxes.
d. Defer interest income to a later date.
e. None of the above.
Q:
Short-term financing might be riskier than long-term financing because, during periods of tight credit, the firm might not be able to rollover (renew) its debt.
a. True
b. False
Q:
Accruals represent a spontaneous source of funding but, unfortunately, due to economic forces, firms have little control over the level of these accounts.
a. True
b. False
Q:
Temporary current assets are assets used specifically to finance particular projects in the firm's capital budget.
a. True
b. False
Q:
Net working capital is defined as
a. current assets plus current liabilities
b. current liabilities
c. current assets
d. current assets minus current liabilities
Q:
The cash conversion cycle is the length of time from
a. the payment of accrued wages to manufacture a product until the sale of that product.
b. the payment of accrued wages to manufacture a product until the collection of accounts receivable associated with the sale of that product.
c. the payment for the purchase of raw materials to manufacture a product until the sale of that product.
d. the payment for the purchase of raw materials to manufacture a product until the collection of accounts receivable associated with the sale of that product.
Q:
The best way to get a comprehensive picture of a firm's liquidity position is to examine its ____, which forecasts cash inflows and outflows.
a. cash and marketable securities
b. net working capital
c. current ratio
d. cash budget
Q:
Refer to Fashion Clothiers Inc. What is Fashion Clothiers' minimum cost of ordering and holding inventory?
a. $6,254
b. $10,733
c. $11,560
d. $13,563
e. $19,825
Q:
Refer to East Lansing Appliances. What would be the incremental bad debt losses if the change were made?
a. $315,000
b. $260,500
c. u2212$260,500 (bad debt losses would decline)
d. u2212$315,000 (bad debt losses would decline)
e. $0 (no change would occur)
Q:
Reston Inc. has expected sales of $17,000,000. While 10 percent of its customers pay cash, the remaining 90 percent pay on credit with 40 percent paying on Day 10, 30 percent paying on Day 20, 15 percent paying on Day 25, and 15 percent paying on Day 30. Assume that the cost of funds invested in receivables is 10 percent. Suppose that the firm's customers begin paying later, such that the new DSO increases to 24 days, that the firm uses a 360-day year, and that the firm's variable cost ratio is 80 percent. What is the additional interest cost to Reston of the additional investment in A/R caused by the delay in payment by its customers? a. $19,550 b. $24,438 c. $42,500 d. $78,625 e. $102,000
Q:
Your firm buys on credit terms of 2/10, net 45, and it always pays on day 45. If you calculate that this policy effectively costs your firm $157,500 each year, what is the firm's average accounts payable balance?
a. $1,234,000
b. $75,000
c. $157,500
d. $625,000
e. $750,000
Q:
A firm purchases raw materials on June 1st. It converts the raw materials into inventory by the last day of the month, June 30th. However, it pays for the materials on June 15th. On July 31st, it sells the finished goods inventory. Then the firm collects cash from the sale one month later on August 31st. If this sequence accurately represents the firm's average working capital cycle, what is the firm's cash conversion cycle in days?
a. 45 days
b. 77 days
c. 61 days
d. 107 days
e. 30 days
Q:
Dixie Tours Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 35 days after the invoice date. Net purchases amount to $720,000 per year. What is the approximate percentage cost of its non-free trade credit?
a. 17.2%
b. 23.6%
c. 26.1%
d. 7%
e. 50.6%