FNAN 522 EXAM STUDY GUIDE FINAL
PAPER QUESTIONS AND SOLUTIONS
◉ Which of the following is a common way for a business to
obtain leverage?
a. Borrow money from a financial institution.
b. All of these answers.
c. Purchase fixed assets, such as machinery or land.
d. Sell commercial paper that it issues on the open market.
Answer: b. All of these answers.
◉ Which of the following regarding the possible financial impacts
of leverage of a company is correct?
Select one:
a. Leverage increases risk, which decreases a stock's value.
b. Involuntary leverage is typically caused by eroding equity value,
not additional debt.
c. All of these answers.
d. At an ideal level of financial leverage, a company's return on
equity decreases.
Answer: b. Involuntary leverage is typically caused by eroding
equity value, not additional debt.
, ◉ Which of the following statements regarding the cost of capital
and its effect on capital structure and investment choices is
correct?
a. All of these answers.
b. For an investment to be worthwhile, the expected return must
be greater than the cost of capital.
c. Because of tax advantages, it is cheaper to issue new equity than
debt.
d. Adding debt does not increase a company's interest rate.
Answer: b. For an investment to be worthwhile, the expected
return must be greater than the cost of capital.
◉ Which of the following statements regarding the use of the
pecking order theory is true?
Select one:
a. All of these answers.
b. Some academics have demonstrated that pecking theory fails
when applied to some firms.
c. In pecking theory, internal financing is superior to debt which is
superior to selling more equity.
d. The pecking order theory argues that when a company sells its
shares, that is a negative signal.
Answer: a. All of these answers.
PAPER QUESTIONS AND SOLUTIONS
◉ Which of the following is a common way for a business to
obtain leverage?
a. Borrow money from a financial institution.
b. All of these answers.
c. Purchase fixed assets, such as machinery or land.
d. Sell commercial paper that it issues on the open market.
Answer: b. All of these answers.
◉ Which of the following regarding the possible financial impacts
of leverage of a company is correct?
Select one:
a. Leverage increases risk, which decreases a stock's value.
b. Involuntary leverage is typically caused by eroding equity value,
not additional debt.
c. All of these answers.
d. At an ideal level of financial leverage, a company's return on
equity decreases.
Answer: b. Involuntary leverage is typically caused by eroding
equity value, not additional debt.
, ◉ Which of the following statements regarding the cost of capital
and its effect on capital structure and investment choices is
correct?
a. All of these answers.
b. For an investment to be worthwhile, the expected return must
be greater than the cost of capital.
c. Because of tax advantages, it is cheaper to issue new equity than
debt.
d. Adding debt does not increase a company's interest rate.
Answer: b. For an investment to be worthwhile, the expected
return must be greater than the cost of capital.
◉ Which of the following statements regarding the use of the
pecking order theory is true?
Select one:
a. All of these answers.
b. Some academics have demonstrated that pecking theory fails
when applied to some firms.
c. In pecking theory, internal financing is superior to debt which is
superior to selling more equity.
d. The pecking order theory argues that when a company sells its
shares, that is a negative signal.
Answer: a. All of these answers.
