Beta values are highly dependent on the covariance of a


[1] The explicit costs, such as the legal expenses, associated with corporate default are classified as _____ costs.

[A] beta conversion

[B] direct bankruptcy

[C] indirect bankruptcy

[2] An indirect cost of bankruptcy is the loss of key employees.

[A] True

[B] False

[3] A legal attempt to financially restructure a failing firm so that it can continue operating as a going concern is called a reorganization.

[A] True

[B] False

[4] The optimal capital structure has been achieved when the:

[A] weight of equity is equal to the weight of debt.

[B] debt-to-equity ratio selected results in the lowest possible weighted average cost of capital.

[C] cost of equity is maximized.

[5] The optimal capital structure will tend to include more debt for firms with:

[A] less taxable income.

[B] lower probability of financial distress.

[C] substantial tax shields from other sources.

[6] The optimal capital structure of a firm:

[A] will remain constant over time unless the firm makes an acquisition.

[B] will be the same for all firms in the same industry.

[C] will vary over time as taxes and market conditions change.

[7] In a world with corporate taxes, MM theory implies that that all firms should choose an all-debt capital structure.

[A] True

[B] False

[8] A firm is technically insolvent when:

[A] the value of its stock declines by more than 50 percent in any given 12-month period.

[B] the value of the firm's assets is less than the value of the firm's liabilities.

[C] it is unable to meet its financial obligations.

[9] Which one of the following statements is correct concerning a Chapter 7 bankruptcy?

[A] A firm reorganizes its operations in an effort to return to being a viable concern.

[B] A trustee will assume control of the firm's assets until those assets can be liquidated.

[10] If the net present value of a project is positive (non-zero), then the project's internal rate of return will exceed its required rate of return.

[A] True

[B] False

[11] Which one of these methods uses accounting values rather than financial values?

[A] AAR

[B] IRR

[C] NPV

[12] An investment should be accepted if the NPV is positive and rejected if it is negative.

[A] True

[B] False

[13] The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:

[A] net present value.

[B] payback period.

[C] internal rate of return.

[14] An investment is acceptable if its average accounting return (AAR):

[A] exceeds the target AAR.

[B] is less than the target AAR.

[15] The discount rate that makes the net present value of an investment exactly equal to zero is called the internal rate of return.

[A] True

[B] False

[16] The most valuable investment given up if an alternative investment is chosen is referred to as a(n):

[A] sunk cost.

[B] opportunity cost.

[C] erosion cost.

[17] The cost of test marketing a product prior to deciding whether or not to produce the product is a sunk cost.

[A] True

[B] False

[18] An asset will be depreciated faster using MACRS rather than the straight-line method.

[A] True

[B] False

[19] The financial break-even point determines which one of these values?

[A] Fixed costs

[B] Variable cost per unit

[C] Sales quantity

[20] The return earned in an average year over a multi-year period is called the _____ average return.

[A] arithmetic

[B] standard

[C] geometric

[21] The capital gains yield plus the dividend yield on a security is called the:

[A] geometric return.

[B] total return.

[C] variance of returns.

[22] Which one of the following is an example of a nondiversifiable risk?

[A] A poorly managed firm suddenly goes out of business due to lack of sales

[B] A key employee of a firm suddenly resigns and accepts employment with a key competitor

[C] A well respected chairman of the Federal Reserve suddenly resigns

[23] Beta values are highly dependent on the covariance of a security with the market.

[A] True

[B] False

[24] Insider trading does not offer any advantages if the financial markets are:

[A] inefficient.

[B] semiweak form efficient.

[C] strong form efficient.

[25] MM Propositions ignore bankruptcy costs.

[A] True

[B] False

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Financial Management: Beta values are highly dependent on the covariance of a
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