FIN 6100 ACTUAL SETS ANSWERS AND QUESTIONS
SET A+
✔✔For a levered firm, - ✔✔as EBIT increases, EPS increases by a larger percentage.
✔✔When comparing levered vs. unlevered capital structures, leverage works to
increase EPS for high levels of operating income because - ✔✔interest payments on
the debt stay fixed, leaving more income to be more distributed over less shares
✔✔T/F According to Proposition II, the cost of equity increases as more debt is issued,
but the weighted average cost of capital remains unchanged - ✔✔True
✔✔T/F Financial leverage increases the expected return and risk of the shareholder -
✔✔True
✔✔Risk shifting implies - ✔✔When faced with bankruptcy, managers tend to invest in
high ris, high return projects
✔✔The trade-off theory of capital structure predicts that - ✔✔safe firms should borrow
more than risky ones
✔✔T/F Financial leverage affects the risk of the firm's common stock - ✔✔True
✔✔The pecking order theory of capital structure implies that - ✔✔Firms prefer internal
finance and debt to equity when external financing is required
✔✔Corporations typically have the right to repurchase a debt issue prior to maturity at a
fixed price, but only after some number of years have passed. Such debt is said to
feature - ✔✔Callable
✔✔Which of the following is not a common method used to align managerial incentives
to those of the investor - ✔✔higher base salary
, ✔✔Which is not true about shareholders - ✔✔institutional ownership concentrates
ownership, making it harder to replace management
✔✔Moral hazard - ✔✔When the act of insuring an event increases the likelihood that
the event will happen
✔✔What is most effective in reducing agency costs in a firm - ✔✔requiring managers to
buy stock in the firm
✔✔What is not effective in reducing agency problems - ✔✔increasing foreign ownership
✔✔What is true regarding board of directors - ✔✔audit and compensation committees
must be chaired by outsiders
✔✔Adverse selection - ✔✔the problem of incomplete information - of choosing
alternatives without fully knowing the details of available options
✔✔Not a responsibility of BoD - ✔✔Deciding on new promotional campaign
✔✔Not a technique used to forecast growth when creating financial projections -
✔✔percentage of sales method
✔✔The principal amount of a bond that is repaid at the end of the loan term is called the
bond's: - ✔✔Face value
✔✔annual coupon payment divided by market price of bond is - ✔✔current yield
✔✔Which would you find in a bond's indenture - ✔✔coupon rate
✔✔An agreement giving the bond issuer the option to repurchase the bond at a
specified price prior to maturity is the - ✔✔call provision
✔✔Not a component of interest rate - ✔✔fed funds rate
✔✔Which would increase the credit spread on a bond - ✔✔a decrease in a company's
bond rating
✔✔the ______ premium is that portion of a nominal interest rate or bond yield that
represents compensation for the possibility of nonpayment by the bond issuer -
✔✔default risk
✔✔All else constant, a bond will sell at _____ when the coupon rate is _____ the yield
to maturity. - ✔✔a discount; less than
SET A+
✔✔For a levered firm, - ✔✔as EBIT increases, EPS increases by a larger percentage.
✔✔When comparing levered vs. unlevered capital structures, leverage works to
increase EPS for high levels of operating income because - ✔✔interest payments on
the debt stay fixed, leaving more income to be more distributed over less shares
✔✔T/F According to Proposition II, the cost of equity increases as more debt is issued,
but the weighted average cost of capital remains unchanged - ✔✔True
✔✔T/F Financial leverage increases the expected return and risk of the shareholder -
✔✔True
✔✔Risk shifting implies - ✔✔When faced with bankruptcy, managers tend to invest in
high ris, high return projects
✔✔The trade-off theory of capital structure predicts that - ✔✔safe firms should borrow
more than risky ones
✔✔T/F Financial leverage affects the risk of the firm's common stock - ✔✔True
✔✔The pecking order theory of capital structure implies that - ✔✔Firms prefer internal
finance and debt to equity when external financing is required
✔✔Corporations typically have the right to repurchase a debt issue prior to maturity at a
fixed price, but only after some number of years have passed. Such debt is said to
feature - ✔✔Callable
✔✔Which of the following is not a common method used to align managerial incentives
to those of the investor - ✔✔higher base salary
, ✔✔Which is not true about shareholders - ✔✔institutional ownership concentrates
ownership, making it harder to replace management
✔✔Moral hazard - ✔✔When the act of insuring an event increases the likelihood that
the event will happen
✔✔What is most effective in reducing agency costs in a firm - ✔✔requiring managers to
buy stock in the firm
✔✔What is not effective in reducing agency problems - ✔✔increasing foreign ownership
✔✔What is true regarding board of directors - ✔✔audit and compensation committees
must be chaired by outsiders
✔✔Adverse selection - ✔✔the problem of incomplete information - of choosing
alternatives without fully knowing the details of available options
✔✔Not a responsibility of BoD - ✔✔Deciding on new promotional campaign
✔✔Not a technique used to forecast growth when creating financial projections -
✔✔percentage of sales method
✔✔The principal amount of a bond that is repaid at the end of the loan term is called the
bond's: - ✔✔Face value
✔✔annual coupon payment divided by market price of bond is - ✔✔current yield
✔✔Which would you find in a bond's indenture - ✔✔coupon rate
✔✔An agreement giving the bond issuer the option to repurchase the bond at a
specified price prior to maturity is the - ✔✔call provision
✔✔Not a component of interest rate - ✔✔fed funds rate
✔✔Which would increase the credit spread on a bond - ✔✔a decrease in a company's
bond rating
✔✔the ______ premium is that portion of a nominal interest rate or bond yield that
represents compensation for the possibility of nonpayment by the bond issuer -
✔✔default risk
✔✔All else constant, a bond will sell at _____ when the coupon rate is _____ the yield
to maturity. - ✔✔a discount; less than
