ch5 - Answer Key Closed Book 1 Assuming a financial manager...

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Answer Key Closed Book. 1. Assuming a financial manager was doing their job, and after selecting the optimal capital budget, minimizing WACC is equivalent to maximizing shareholders wealth. a. True b . F a l s e 2. Explain why your answer to the previous question was correct. Minimizing WACC implies maximizing firm value which, for a given set level of assets, is equivalent to maximisng shareholders wealth. 3. For bonds, price sensitivity to a given change in interest rates generally increases as years remaining to maturity increases. a. True b . F a l s e 4. If you use the constant dividend growth model to value a stock, which of the following is certain to cause you to DECREASE your estimate of the current value of the stock? a. Decreasing the required rate of return for the stock. b. Decreasing the estimate of the amount of next year’s dividend. c. Increasing the firm's long run earnings growth rate. d. Decreasing the rate of inflation in the economy. e. none of the above 5. If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium. a. True b. False 6. The before-tax cost of debt, which is lower than the after-tax cost, is used as the component cost of debt for purposes of developing the firm's WACC. a. True b. False 7. Under pecking order theory, an acquisition financed by debt is a better capital budgeting project than an internal expansion financed by issuing new stock. a. True b . F a l s e 8. It is generally easier for management to control operating risk than financial risk. A) True B) False 9. Historically which of the following BEST describes the correct order of returns? (lowest to highest)? Assume the corporate bonds, preferred stock and common stock is for a single (the same) company. a . T-bills, T-bonds, Corporate bonds, Preferred Stocks, Common Stocks b. T-bills, T-bonds, Corporate Bonds, Common Stocks, Preferred Stocks c. T-bonds, Corporate bonds, T-bills, Common Stocks, Preferred Stocks d. Preferred Stocks, T-bills, T-bonds, Corporate bonds, Common Stocks e. Common Stocks, Preferred Stocks, Corporate Bonds, T-bills, T-bonds 10. If a firm utilizes debt financing, a decrease in earnings before interest and taxes (EBIT) will result in a more than proportionate decrease in earnings per share. A) True B) False 11. Which of the following statements is most correct? a. The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project.
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ch5 - Answer Key Closed Book 1 Assuming a financial manager...

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