Principles of Finance – Module 7 Quiz
Question 1 points
Suppose a new company decides to raise its initial $200 million of capital as $100
million of common equity and $100 million of long-term debt. By an iron-clad provision
in its charter, the company can never borrow any more money. Which of the following
statements is correct?
Question options:
a) If the debt were raised by issuing $50 million of debentures
and $50 million of first mortgage bonds, we could be
absolutely certain that the firm's total interest expense would
be lower than if the debt were raised by issuing $100 million of
debentures.
b) If the debt were raised by issuing $50 million of debentures
and $50 million of first mortgage bonds, we could be
absolutely certain that the firm's total interest expense would
be lower than if the debt were raised by issuing $100 million of
first mortgage bonds.
c) The higher the percentage of total debt represented by
debentures, the greater the risk of, and hence the interest rate
on, the debentures.
d) The higher the percentage of total debt represented by
debentures, the greater the risk of, and hence the interest rate
on, the debentures.
e) In this situation, we cannot tell for sure how, or whether, the
firm's total interest expense on the $100 million of debt would
be affected by the mix of debentures versus first mortgage
bonds. Interest rates on the two types of bonds would vary as
their percentages were changed, but the result might well be
such that the firm's total interest charges would not be
affected materially by the mix between the two.
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Question 2 points
Working capital policy involves
, Question options:
a) The level of current assets.
b) The financing of current assets.
c) Current maturities of long-term debt.
d) All of the above.
e) Only answers a and b above.
Question 3 points
For a typical firm with a given capital structure, which of the following is correct?
(Note: ra = WACC, and all rates are after taxes.)
Question options:
a) rd > re > rs > ra.
b) rs > re > rd > ra.
c) ra > re > rs > rd.
d) re > rs > ra > rd.
e) None of the statements above is correct.
Question 4 points
__ is the portion of net income not paid out in the form of dividends.
Question options:
a) Par value
b) Paid in capital
c) Return earnings
Question 1 points
Suppose a new company decides to raise its initial $200 million of capital as $100
million of common equity and $100 million of long-term debt. By an iron-clad provision
in its charter, the company can never borrow any more money. Which of the following
statements is correct?
Question options:
a) If the debt were raised by issuing $50 million of debentures
and $50 million of first mortgage bonds, we could be
absolutely certain that the firm's total interest expense would
be lower than if the debt were raised by issuing $100 million of
debentures.
b) If the debt were raised by issuing $50 million of debentures
and $50 million of first mortgage bonds, we could be
absolutely certain that the firm's total interest expense would
be lower than if the debt were raised by issuing $100 million of
first mortgage bonds.
c) The higher the percentage of total debt represented by
debentures, the greater the risk of, and hence the interest rate
on, the debentures.
d) The higher the percentage of total debt represented by
debentures, the greater the risk of, and hence the interest rate
on, the debentures.
e) In this situation, we cannot tell for sure how, or whether, the
firm's total interest expense on the $100 million of debt would
be affected by the mix of debentures versus first mortgage
bonds. Interest rates on the two types of bonds would vary as
their percentages were changed, but the result might well be
such that the firm's total interest charges would not be
affected materially by the mix between the two.
Hide question 1 feedback
Feedback
Question 2 points
Working capital policy involves
, Question options:
a) The level of current assets.
b) The financing of current assets.
c) Current maturities of long-term debt.
d) All of the above.
e) Only answers a and b above.
Question 3 points
For a typical firm with a given capital structure, which of the following is correct?
(Note: ra = WACC, and all rates are after taxes.)
Question options:
a) rd > re > rs > ra.
b) rs > re > rd > ra.
c) ra > re > rs > rd.
d) re > rs > ra > rd.
e) None of the statements above is correct.
Question 4 points
__ is the portion of net income not paid out in the form of dividends.
Question options:
a) Par value
b) Paid in capital
c) Return earnings
