FIN 365 TEST 1 COMPLETE EXAM QUSTIONS WITH
DETAILED VERIFIED ANSWERS /ALREADY
GRADED A+
Total Capitalization - ans -long term debt + shareholders equity
Common Stockholders Equity - ans -net worth -par value of preferred stock
if a company has excessive investments in assets then... - ans -its operating capital
will be unduly high, which will reduce its FCF and its stock price
if a company does not have ENOUGH assets then... - ans -it will lose sales, which
will hurt profitability, FCF and stock price
UNCONTROLLABLE factors that influence a company's WACC - ans --market
conditions, especially interest rates
-the market risk premium (investors aversion to risk)
-tax rates
CONTROLLABLE factors that influence a company's WACC - ans --capital structure
policy
-dividend policy
-investment policy (firms w/ riskier projects = higher cost of equity)
Pure Play Method: For Estimating Beta for a Division or a Project - ans -1. find
several publicly traded companies exclusively in the project's business
2. use average of their betas as a proxy for the project's beta
Accounting Beta Method for Estimating Beta - ans -Run regression between
project's ROA and S&P Index ROA.
Accounting betas are correlated (0.5 - 0.6) with market betas.
But normally can't get data on new projects' ROAs before the capital budgeting
decision has been made.
, 3 types of project risk - ans -1. Stand-alone risk: variability of the project's
expected return
2. Corporate risk: variability the project contributes to the corporation's returns
3. Market risk: the risk of the project as seen by a well-diversified stockholder
(measured by its effect on the firm's overall beta coefficient)
Costs of Issuing New Common Stock - ans --When a company issues new common
stock they also have to pay flotation costs to the underwriter
-Issuing new common stock may send a negative signal to the capital markets,
which may depress the stock price
what do flotation costs depend on? - ans --the risk of the firm and the capital
being raised
Current vs. Historical Cost of Debt - ans -NEVER base the cost of debt on the
coupon rate on a firm's existing debt, MUST BE based on the current interest on
NEW debt
Mixing current and historical measures to estimate the market risk premium - ans
-NEVER use the historical average return on stocks in conjunction w/ the current
return on T-bonds
*historical average return on bonds should be SUBTRACTED from the past
average return
Book weights vs Market weights - ans -1. use target capital structure first
2. if no target weights, use current market value of equity
3. if no market value, use book value of debt
What does an increase in the EBITDA coverage ratio mean? - ans -indicates an
improvement in the company's financial position
An NEGATIVE AFN indicates... - ans -retained earnings and spontaneous liabilities
are far more than sufficient to finance the additional assets needed
DETAILED VERIFIED ANSWERS /ALREADY
GRADED A+
Total Capitalization - ans -long term debt + shareholders equity
Common Stockholders Equity - ans -net worth -par value of preferred stock
if a company has excessive investments in assets then... - ans -its operating capital
will be unduly high, which will reduce its FCF and its stock price
if a company does not have ENOUGH assets then... - ans -it will lose sales, which
will hurt profitability, FCF and stock price
UNCONTROLLABLE factors that influence a company's WACC - ans --market
conditions, especially interest rates
-the market risk premium (investors aversion to risk)
-tax rates
CONTROLLABLE factors that influence a company's WACC - ans --capital structure
policy
-dividend policy
-investment policy (firms w/ riskier projects = higher cost of equity)
Pure Play Method: For Estimating Beta for a Division or a Project - ans -1. find
several publicly traded companies exclusively in the project's business
2. use average of their betas as a proxy for the project's beta
Accounting Beta Method for Estimating Beta - ans -Run regression between
project's ROA and S&P Index ROA.
Accounting betas are correlated (0.5 - 0.6) with market betas.
But normally can't get data on new projects' ROAs before the capital budgeting
decision has been made.
, 3 types of project risk - ans -1. Stand-alone risk: variability of the project's
expected return
2. Corporate risk: variability the project contributes to the corporation's returns
3. Market risk: the risk of the project as seen by a well-diversified stockholder
(measured by its effect on the firm's overall beta coefficient)
Costs of Issuing New Common Stock - ans --When a company issues new common
stock they also have to pay flotation costs to the underwriter
-Issuing new common stock may send a negative signal to the capital markets,
which may depress the stock price
what do flotation costs depend on? - ans --the risk of the firm and the capital
being raised
Current vs. Historical Cost of Debt - ans -NEVER base the cost of debt on the
coupon rate on a firm's existing debt, MUST BE based on the current interest on
NEW debt
Mixing current and historical measures to estimate the market risk premium - ans
-NEVER use the historical average return on stocks in conjunction w/ the current
return on T-bonds
*historical average return on bonds should be SUBTRACTED from the past
average return
Book weights vs Market weights - ans -1. use target capital structure first
2. if no target weights, use current market value of equity
3. if no market value, use book value of debt
What does an increase in the EBITDA coverage ratio mean? - ans -indicates an
improvement in the company's financial position
An NEGATIVE AFN indicates... - ans -retained earnings and spontaneous liabilities
are far more than sufficient to finance the additional assets needed
