Leach TB Chap07 Ed3


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CHAPTER 7 TYPES AND COSTS OF FINANCIAL CAPITAL True-False Questions F. 1. The accounting emphasis on accrued revenue and expenses and depreciation is the same emphasis as that of finance managers. T. 2. Traditional accounting does not focus on the implicit cost of equity, that is the required capital gains to complement dividends. However, evaluation methods exist to determine this value by financial managers. F. 3. Inflation premium is the rising prices not offset by increasing quality of goods being purchased. F. 4. The relationship between real interest rates and time to maturity when default risk is constant is called the term structure of interest rates. T. 5. The graph of the term structure of interest rates, which plots interest rates to time to maturity is called the yield curve. F. 6. Subordinated debt is secured by a venture’s assets, while senior debt has an inferior claim to a venture’s assets. T. 7. Investment risk is the chance or probability of financial loss on one’s venture investment, and can be assumed by debt, equity, and founding investors. F. 8. Closely held corporations are those companies whose stock is traded over- the-counter. T. 9. Organized exchanges have physical locations where trading takes place, while the over-the-counter market is comprised of a network of brokers and dealers that interact electronically. T. 10. Market cap is determined by multiplying a firm’s current stock price by the number of shares outstanding. F. 11. The excess average return of long-term government bonds over common stock is called the market risk premium. T. 12. The weighted average cost of capital is simply the blended, or weighted cost of raising equity and debt capital. 45
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Chapter 7: Types and Costs of Financial Capital T. 13. Formal historical accounting procedures include explicit records of debt (interest and principal) and dividend capital costs. F. 14. Public financial markets are markets for the creation, sale and trade of illiquid securities having less standardized negotiated features. F. 15. The risk-free interest rate is the interest rate on debt that is virtually free of inflation risk. T. 16. A nominal interest rate is an observed or stated interest rate. F. 17. A venture’s “riskiness” in terms of poor performance or failure is usually very high during the maturity stage of its life cycle. T. 18. A venture’s “riskiness” in terms of poor performance or failure is usually high to moderate during the rapid-growth stage of its life cycle. T. 19. First-round financing during a venture’s survival stage comes primarily from venture capitalists and investment banks. F.
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This note was uploaded on 12/05/2009 for the course FIN Fin 595 taught by Professor Shabbir during the Spring '09 term at CSU Dominguez Hills.

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