Chapter 5 & 6 Corporate Finance

20 Questions | Total Attempts: 88

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Chapter 5 & 6 Corporate Finance

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Questions and Answers
  • 1. 
    A bond which is valued at par has a yield to maturity which is Select one:
    • A. 

      A. equal to its coupon rate

    • B. 

      B. above its coupon rate

    • C. 

      C. below its coupon rate

    • D. 

      D. none of the above

  • 2. 
    As the price of a bond decreases, the coupon rate Select one:
    • A. 

      A. increases

    • B. 

      B. decreases

    • C. 

      C. remains the same

  • 3. 
    To calculate the yield to maturity of a bond, you are using which of the following capital budgeting techniques? Select one:
    • A. 

      A. NPV

    • B. 

      B. IRR

    • C. 

      C. PVI

    • D. 

      D. none of the above

  • 4. 
    The cost of equity can be calculated by more than one method. Select one:
    • A. 

      True

    • B. 

      False

  • 5. 
    The Capital Asset Pricing Model relates the historical returns of that company to Select one:
    • A. 

      A. the company's industry

    • B. 

      B. the market as a whole

    • C. 

      C. the company's future growth

    • D. 

      D. none of the above

  • 6. 
    Higher dividends do not necessarily result in higher costs of equity. Select one:
    • A. 

      True

    • B. 

      False

  • 7. 
    As the price of a bond increases, the coupon rate Select one:
    • A. 

      A. increases

    • B. 

      B. decreases

    • C. 

      C. remains the same

  • 8. 
    A firm may generate equity through Select one:
    • A. 

      A. earnings

    • B. 

      B. issuance of stock

    • C. 

      C. both A and B

    • D. 

      D. neither A nor B

  • 9. 
    During a recession, which of the following firms is riskier ? Select one:
    • A. 

      A. a firm with high variable and low fixed costs

    • B. 

      B. a firm with high fixed costs and low variable costs

    • C. 

      C. a firm with significant manufacturing overhead

    • D. 

      D. B and C

  • 10. 
    The efficient market theory holds that, at any given moment the prices of securities reflect all that is or can be known about a company's future. Select one:
    • A. 

      True

    • B. 

      False

  • 11. 
    The acquiror begins the negotiation with Select one or more:
    • A. 

      A. the maximum price it can pay without post-merger earnings per share dilution

    • B. 

      B. the present value of the target's enhanced cash flows

    • C. 

      C. both A and B

    • D. 

      D. neither A nor B

  • 12. 
    The maximum price that a target could hope to obtain, based solely on assets is the Select one:
    • A. 

      A. book value

    • B. 

      B. replacement cost

    • C. 

      C. liquidation value

    • D. 

      D. none of the above

  • 13. 
    Earnings dilution considers the income that the target firm would add to the acquirer's net income and computes the number of shares that could be issued without diluting the EPS for the existing shareholders. Select one:
    • A. 

      True

    • B. 

      False

  • 14. 
    Market capitalization is obtained by multiplying the number of shares outstanding by the price per share. Select one:
    • A. 

      True

    • B. 

      False

  • 15. 
    The market capitalization is obtained by multiplying the number of shares outstanding by the earnings per share. Select one:
    • A. 

      True

    • B. 

      False

  • 16. 
    The target firm determines its liquidation value and the present value of its relevant stand alone cash flows and selects the higher value. This is the target's Select one:
    • A. 

      A. maximum acceptable price

    • B. 

      B. minimum acceptable price

    • C. 

      C. neither A nor B

  • 17. 
    Company A has unused production capacity and makes a product similar to Company B. Company B acquires Company A to obtain the unused production capacity. This is an example of Select one:
    • A. 

      A. vertical integration downstream

    • B. 

      B. vertical integration upstream

    • C. 

      C. horizontal integration

    • D. 

      D. none of the above

  • 18. 
    Book value is based on historical cost. Select one:
    • A. 

      True

    • B. 

      False

  • 19. 
    The book value of the firm is a similar concept to the net worth of the individual. Select one:
    • A. 

      True

    • B. 

      False

  • 20. 
    Company A has unused debt capacity. Company B acquires Company A to enhance Select one:
    • A. 

      A. financing capability

    • B. 

      B. diversification

    • C. 

      C. cash flows

    • D. 

      D. none of the above

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