FINC 341 FINAL EXAM THEORY QUESTIONS
T/F: EVA considers the cost of debt AND the cost of equity - Answers -T
T/F: EVA is highly correlated with stock price - Answers -T
T/F: EVA is good for measuring management performance in specific divisions -
Answers -T
T/F: MVA is good for measuring management performance in specific divisions -
Answers -F
Old Dividend Exclusion Rules - Answers -70/80/100
New Dividend Exclusion Rules - Answers -50/65/100
T/F: The higher the tax bracket an individual is in, the more attractive municipal bonds
are - Answers -T
T/F: Dividend income received by individuals used to be taxed as ordinary income -
Answers -T
T/F: You can reduce annual ordinary income by 3000 when dealing with capital losses -
Answers -T
If debt ratio increases, EM _____________________ - Answers -increases
T/F: If a firm maximizes ROE, it's quite probable it has taken on too much debt -
Answers -T
T/F: Firms have learned that using ROE for bonuses can be problematic, and are
increasingly turning to EVA to determine bonuses - Answers -T
T/F: A number of companies use ROE to determine executives' bonuses, but it can
entice an executive to turn down a project that is profitable but brings down the average
ROE for the year - Answers -T
T/F: When two projects of different size/investment are compared using ROE, the one
with the lower ROE adds less value ($) to the firm than the other one - Answers -F
T/F: A firm's ROA can equal its ROE only if the firm has no debt in its capital structure -
Answers -T
DR = - Answers -1-(1/EM)
, EM = - Answers -1/(1-DR)
T/F: A benefit of focusing on ROE is that it ensures that all profitable projects will be
accepted so that the average ROE of the firm will be boosted - Answers -F
T/F: Since ROE is an important measure of performance, financial managers should try
to maximize the company's ROE - Answers -F
T/F: EVA is different for Net Income because EVA reflects the cost of equity as well as
the cost of debt - Answers -T
T/F: When two mutually exclusive projects are being considered, the one with the higher
ROE should be chosen, regardless of the project size - Answers -F
T/F: A firm's EPS is highly correlated with its stock price - Answers -F
T/F: While the NASDAQ trades more dollar volume than the NYSE, the NYSE has a
higher share volume traded than the NASDAQ - Answers -F
T/F: While the NASDAQ trades less dollar volume than the NYSE, the NYSE has a
lower share volume traded than the NASDAQ - Answers -T
T/F: In 1972, 68 brokers created the NYSE Board under the Buttonwood Agreement -
Answers -F
T/F: In 1972, 24 brokers created the NYSE Board under the Buttonwood Agreement -
Answers -T
T/F: In a dutch auction, stocks are sold at the highest bid price that would sell all of the
shares in the offering - Answers -T
T/F: When a company puts out a bond issue and then two years later puts out another
bond issue, the second bond issue is being sold on the secondary market - Answers -F
T/F: A dealer's profit is the bid-ask spread, and this spread generally becomes larger
when the stock is traded more often - Answers -F
T/F: The Federal Reserve typically lowers interest rates during recessions to stimulate
the economy - Answers -T
T/F: When a manager's bonus compensation is determined by ROE, they may be
encouraged to not accept good projects with lower (but good) ROEs - Answers -T
T/F: EVA is different from Net Income because EVA reflects the cost of equity but not
the cost of debt - Answers -F
T/F: EVA considers the cost of debt AND the cost of equity - Answers -T
T/F: EVA is highly correlated with stock price - Answers -T
T/F: EVA is good for measuring management performance in specific divisions -
Answers -T
T/F: MVA is good for measuring management performance in specific divisions -
Answers -F
Old Dividend Exclusion Rules - Answers -70/80/100
New Dividend Exclusion Rules - Answers -50/65/100
T/F: The higher the tax bracket an individual is in, the more attractive municipal bonds
are - Answers -T
T/F: Dividend income received by individuals used to be taxed as ordinary income -
Answers -T
T/F: You can reduce annual ordinary income by 3000 when dealing with capital losses -
Answers -T
If debt ratio increases, EM _____________________ - Answers -increases
T/F: If a firm maximizes ROE, it's quite probable it has taken on too much debt -
Answers -T
T/F: Firms have learned that using ROE for bonuses can be problematic, and are
increasingly turning to EVA to determine bonuses - Answers -T
T/F: A number of companies use ROE to determine executives' bonuses, but it can
entice an executive to turn down a project that is profitable but brings down the average
ROE for the year - Answers -T
T/F: When two projects of different size/investment are compared using ROE, the one
with the lower ROE adds less value ($) to the firm than the other one - Answers -F
T/F: A firm's ROA can equal its ROE only if the firm has no debt in its capital structure -
Answers -T
DR = - Answers -1-(1/EM)
, EM = - Answers -1/(1-DR)
T/F: A benefit of focusing on ROE is that it ensures that all profitable projects will be
accepted so that the average ROE of the firm will be boosted - Answers -F
T/F: Since ROE is an important measure of performance, financial managers should try
to maximize the company's ROE - Answers -F
T/F: EVA is different for Net Income because EVA reflects the cost of equity as well as
the cost of debt - Answers -T
T/F: When two mutually exclusive projects are being considered, the one with the higher
ROE should be chosen, regardless of the project size - Answers -F
T/F: A firm's EPS is highly correlated with its stock price - Answers -F
T/F: While the NASDAQ trades more dollar volume than the NYSE, the NYSE has a
higher share volume traded than the NASDAQ - Answers -F
T/F: While the NASDAQ trades less dollar volume than the NYSE, the NYSE has a
lower share volume traded than the NASDAQ - Answers -T
T/F: In 1972, 68 brokers created the NYSE Board under the Buttonwood Agreement -
Answers -F
T/F: In 1972, 24 brokers created the NYSE Board under the Buttonwood Agreement -
Answers -T
T/F: In a dutch auction, stocks are sold at the highest bid price that would sell all of the
shares in the offering - Answers -T
T/F: When a company puts out a bond issue and then two years later puts out another
bond issue, the second bond issue is being sold on the secondary market - Answers -F
T/F: A dealer's profit is the bid-ask spread, and this spread generally becomes larger
when the stock is traded more often - Answers -F
T/F: The Federal Reserve typically lowers interest rates during recessions to stimulate
the economy - Answers -T
T/F: When a manager's bonus compensation is determined by ROE, they may be
encouraged to not accept good projects with lower (but good) ROEs - Answers -T
T/F: EVA is different from Net Income because EVA reflects the cost of equity but not
the cost of debt - Answers -F
