MBA 702 Exam 3 Review 2026 | Verified Q&A | Graded A+
1. What does standard deviation indicate in the context of financial risk?
The variability of returns
The average return of an investment
The correlation between two assets
The total value of an investment
2. If the expected return of Stock A increases to 20 percent while Stock B
remains at 8.4 percent, how would this change affect the portfolio weight of
Stock A if the overall expected return of the portfolio remains at 11.6 percent?
The portfolio weight of Stock A would remain unchanged.
The portfolio weight of Stock A would become irrelevant.
The portfolio weight of Stock A would need to decrease.
The portfolio weight of Stock A would need to increase.
3. What is a common argument for maintaining a low dividend policy in
corporations?
Increasing immediate shareholder returns
Retaining earnings for reinvestment
Enhancing stock price through buybacks
Reducing overall tax liabilities
4. Interpret the implications of the free cash flow hypothesis on a company's
decision to issue debt.
, The hypothesis suggests that debt issuance will always lead to higher
dividends for shareholders.
The hypothesis indicates that debt increases the company's overall
risk without any benefits.
The hypothesis states that issuing debt is irrelevant to management's
decisions.
The hypothesis implies that by issuing debt, a company can limit
excess cash that might be wasted, thus aligning management's
interests with those of shareholders.
5. Which one of the following statements most applies to a firm that is suffering
from financial distress?
Stockholders will increase their investment in the firm to protect their
current investment.
Stockholders will generally prefer low-risk over high-risk projects.
Bondholders will desire high-risk projects in order to protect their
investment.
Managers will tend to lower dividends in an effort to protect
shareholder value.
Stockholders ultimately bear the cost of selfish investment
strategies.
6. Describe the implications of a firm with high financial distress choosing to pay
additional dividends.
It implies the firm is experiencing a decrease in stock prices.
It shows the firm is financially healthy and can afford to pay dividends.
It may indicate that the firm is prioritizing short-term shareholder
returns over long-term financial stability.
, It suggests the firm is reinvesting profits for future growth.
7. Describe how a low dividend policy can benefit a corporation's long-term
growth strategy.
A low dividend policy minimizes the tax burden on shareholders.
A low dividend policy guarantees a stable stock price.
A low dividend policy allows a corporation to retain more earnings,
which can be reinvested into growth opportunities.
A low dividend policy ensures higher immediate cash flow for
shareholders.
8. Describe how the debt-equity ratio influences the calculation of asset beta.
The debt-equity ratio increases asset beta by decreasing equity beta.
The debt-equity ratio has no effect on asset beta calculations.
The debt-equity ratio affects asset beta by adjusting the equity beta
to account for the financial risk introduced by debt.
The debt-equity ratio only influences the cost of debt, not asset beta.
9. If a company is known for taking excessive risks and subsequently files for
bankruptcy, what indirect cost might it face in terms of future financing?
Lower operational costs
Increased market share
Improved employee morale
Higher cost of capital
10. Which of the following statements about beta would you agree with?
, beta measures the sensitivity of a stock's return to fluctuations in GDP
beta is the measure of the amount of systematic risk in an
investment
beta is a measure of the amount of unsystematic risk in an investment
beta is an absolute measure of risk
11. If a company with significant free cash flow decides to issue debt, what
potential outcome might align with the free cash flow hypothesis?
An increase in management's discretion over cash usage.
A reduction in agency costs due to increased financial discipline.
An increase in free cash flow available for investment.
A decrease in stock prices due to perceived risk.
12. MM Proposition II without taxes implies that the required return on equity is:
a linear function of the firm's debt-to-equity ratio.
independent of the firm's capital structure.
inversely related to the firm's debt-to-equity ratio.
a result of homemade leverage.
a linear function of the market's rate of interest.
13. Assume LK Metals is similar to its industry with one exception, it has low
fixed costs relative to all other firms in that industry. Given this, you should
expect LK Metals:
the same beta as the industry but a lower beta than the other firms in
the industry.
to have a lower beta than its industry.
1. What does standard deviation indicate in the context of financial risk?
The variability of returns
The average return of an investment
The correlation between two assets
The total value of an investment
2. If the expected return of Stock A increases to 20 percent while Stock B
remains at 8.4 percent, how would this change affect the portfolio weight of
Stock A if the overall expected return of the portfolio remains at 11.6 percent?
The portfolio weight of Stock A would remain unchanged.
The portfolio weight of Stock A would become irrelevant.
The portfolio weight of Stock A would need to decrease.
The portfolio weight of Stock A would need to increase.
3. What is a common argument for maintaining a low dividend policy in
corporations?
Increasing immediate shareholder returns
Retaining earnings for reinvestment
Enhancing stock price through buybacks
Reducing overall tax liabilities
4. Interpret the implications of the free cash flow hypothesis on a company's
decision to issue debt.
, The hypothesis suggests that debt issuance will always lead to higher
dividends for shareholders.
The hypothesis indicates that debt increases the company's overall
risk without any benefits.
The hypothesis states that issuing debt is irrelevant to management's
decisions.
The hypothesis implies that by issuing debt, a company can limit
excess cash that might be wasted, thus aligning management's
interests with those of shareholders.
5. Which one of the following statements most applies to a firm that is suffering
from financial distress?
Stockholders will increase their investment in the firm to protect their
current investment.
Stockholders will generally prefer low-risk over high-risk projects.
Bondholders will desire high-risk projects in order to protect their
investment.
Managers will tend to lower dividends in an effort to protect
shareholder value.
Stockholders ultimately bear the cost of selfish investment
strategies.
6. Describe the implications of a firm with high financial distress choosing to pay
additional dividends.
It implies the firm is experiencing a decrease in stock prices.
It shows the firm is financially healthy and can afford to pay dividends.
It may indicate that the firm is prioritizing short-term shareholder
returns over long-term financial stability.
, It suggests the firm is reinvesting profits for future growth.
7. Describe how a low dividend policy can benefit a corporation's long-term
growth strategy.
A low dividend policy minimizes the tax burden on shareholders.
A low dividend policy guarantees a stable stock price.
A low dividend policy allows a corporation to retain more earnings,
which can be reinvested into growth opportunities.
A low dividend policy ensures higher immediate cash flow for
shareholders.
8. Describe how the debt-equity ratio influences the calculation of asset beta.
The debt-equity ratio increases asset beta by decreasing equity beta.
The debt-equity ratio has no effect on asset beta calculations.
The debt-equity ratio affects asset beta by adjusting the equity beta
to account for the financial risk introduced by debt.
The debt-equity ratio only influences the cost of debt, not asset beta.
9. If a company is known for taking excessive risks and subsequently files for
bankruptcy, what indirect cost might it face in terms of future financing?
Lower operational costs
Increased market share
Improved employee morale
Higher cost of capital
10. Which of the following statements about beta would you agree with?
, beta measures the sensitivity of a stock's return to fluctuations in GDP
beta is the measure of the amount of systematic risk in an
investment
beta is a measure of the amount of unsystematic risk in an investment
beta is an absolute measure of risk
11. If a company with significant free cash flow decides to issue debt, what
potential outcome might align with the free cash flow hypothesis?
An increase in management's discretion over cash usage.
A reduction in agency costs due to increased financial discipline.
An increase in free cash flow available for investment.
A decrease in stock prices due to perceived risk.
12. MM Proposition II without taxes implies that the required return on equity is:
a linear function of the firm's debt-to-equity ratio.
independent of the firm's capital structure.
inversely related to the firm's debt-to-equity ratio.
a result of homemade leverage.
a linear function of the market's rate of interest.
13. Assume LK Metals is similar to its industry with one exception, it has low
fixed costs relative to all other firms in that industry. Given this, you should
expect LK Metals:
the same beta as the industry but a lower beta than the other firms in
the industry.
to have a lower beta than its industry.
