MBA 702 EXAM 3 Questions and Correct
Answers
Question 1
Which one of these best exemplifies "milking the property"?
Correct Answer
a firm with high financial distress paying additional dividends
Clear my choice
Question 2
The LSUS Corporation has a total market value of $89,600 with 6,500 shares of stock
outstanding. What will be the total market value of the firm if it does a 1-for-2 reverse
stock split?
Correct Answer
$89,600
Question 3
The information content effect implies that stock prices will rise when dividends are
increased provided that the dividend increase:
Correct Answer
causes stockholders to increase their expectations of future cash flows
Question 4
Which one of the following statements concerning the standard deviation is correct?
Correct Answer
The higher the standard deviation, the higher the expected return.
Page 1 of 16
,Question 5
Financial executives place the greatest importance on which one of these factors
when setting dividend policy?
Correct Answer
maintaining a consistent dividend policy
Question 6
The free cash flow hypothesis states:
Correct Answer
that issuing debt requires interest and principal payments to be paid thereby
reducing the potential of management to waste resources.
Question 7
LSUS Corporation's stock has a beta of 1.23. The risk-free rate of return is 2.86 percent
and the market rate of return is 11.47 percent. What is the amount of the risk
premium on LSUS Corporation's stock?
Correct Answer
10.59%
Question 8
The weighted average cost of capital for a firm is the:
Correct Answer
overall rate which the firm must earn on its existing assets to maintain its value.
Question 9
You own 300 shares of Abco stock. The firms plans on issuing a dividend of $2.10 a
share one year from today and then issuing a final liquidating dividend of $36.45 a
share two years from today. Your required rate of return is 14.5 percent. Ignoring
taxes, what is the value of one share of this stock to you today?
Correct Answer
$29.64
Page 2 of 16
, Question 10
The date before which a new purchaser of stock is entitled to receive a declared
dividend, but on or after which she does not receive the dividend, is called the _____
date.
Correct Answer
Ex-dividend
Question 11
The LSUS Corproation has a levered cost of equity of 14.29 percent and a pretax cost
of debt of 7.23 percent. The required return on the assets is 11 percent. What is the its
debt-equity ratio based on MM Proposition II with no taxes?
Correct Answer
0.87
Question 12
You own 25 percent of LSUS Corporation, which is an closely held all-equity firm. You
have decided to retire and want to sell your shares. The other shareholders have
agreed to have the firm borrow $1.5 million to purchase all your shares of stock. What
is the total value of this firm today if you ignore taxes?
Correct Answer
$6 million
Question 13
According to the clientele effect, firms can only boost their stock price:
Correct Answer
if an unsatisfied clientele group exists
Page 3 of 16
Answers
Question 1
Which one of these best exemplifies "milking the property"?
Correct Answer
a firm with high financial distress paying additional dividends
Clear my choice
Question 2
The LSUS Corporation has a total market value of $89,600 with 6,500 shares of stock
outstanding. What will be the total market value of the firm if it does a 1-for-2 reverse
stock split?
Correct Answer
$89,600
Question 3
The information content effect implies that stock prices will rise when dividends are
increased provided that the dividend increase:
Correct Answer
causes stockholders to increase their expectations of future cash flows
Question 4
Which one of the following statements concerning the standard deviation is correct?
Correct Answer
The higher the standard deviation, the higher the expected return.
Page 1 of 16
,Question 5
Financial executives place the greatest importance on which one of these factors
when setting dividend policy?
Correct Answer
maintaining a consistent dividend policy
Question 6
The free cash flow hypothesis states:
Correct Answer
that issuing debt requires interest and principal payments to be paid thereby
reducing the potential of management to waste resources.
Question 7
LSUS Corporation's stock has a beta of 1.23. The risk-free rate of return is 2.86 percent
and the market rate of return is 11.47 percent. What is the amount of the risk
premium on LSUS Corporation's stock?
Correct Answer
10.59%
Question 8
The weighted average cost of capital for a firm is the:
Correct Answer
overall rate which the firm must earn on its existing assets to maintain its value.
Question 9
You own 300 shares of Abco stock. The firms plans on issuing a dividend of $2.10 a
share one year from today and then issuing a final liquidating dividend of $36.45 a
share two years from today. Your required rate of return is 14.5 percent. Ignoring
taxes, what is the value of one share of this stock to you today?
Correct Answer
$29.64
Page 2 of 16
, Question 10
The date before which a new purchaser of stock is entitled to receive a declared
dividend, but on or after which she does not receive the dividend, is called the _____
date.
Correct Answer
Ex-dividend
Question 11
The LSUS Corproation has a levered cost of equity of 14.29 percent and a pretax cost
of debt of 7.23 percent. The required return on the assets is 11 percent. What is the its
debt-equity ratio based on MM Proposition II with no taxes?
Correct Answer
0.87
Question 12
You own 25 percent of LSUS Corporation, which is an closely held all-equity firm. You
have decided to retire and want to sell your shares. The other shareholders have
agreed to have the firm borrow $1.5 million to purchase all your shares of stock. What
is the total value of this firm today if you ignore taxes?
Correct Answer
$6 million
Question 13
According to the clientele effect, firms can only boost their stock price:
Correct Answer
if an unsatisfied clientele group exists
Page 3 of 16
