MBA 702 FINAL EXAM PRACTICE
QUESTIONS & VERIFIED CORRECT
ANSWERS
According to the pecking-order theory, a firm's leverage ratio is determined by: -
CORRECT ANSWER the firm's financing needs.
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
All else held constant, which one of these is most apt to increase the WACC of a
leveraged firm? - CORRECT ANSWER a decrease in the tax rate
The interest tax shield is a key reason why: - CORRECT ANSWER the net cost of debt
to a firm is generally less than the cost of equity
Financial executives place the greatest importance on which one of these factors when
setting dividend policy? - CORRECT ANSWER maintaining a consistent dividend policy
Which one of these is most related to a positive covenant? - CORRECT ANSWER
furnishing financial statements to the firm's lenders
The primary purpose of portfolio diversification is to: - CORRECT ANSWER .
eliminate asset-specific risk
MM Proposition II is the proposition that: - CORRECT ANSWER a firm's cost of equity
capital is a positive linear function of the firm's capital structure
Which one of these is a con of paying dividends? - CORRECT ANSWER Dividends are
frequently taxed as ordinary income
A stock with an actual return that lies above the security market line has: - CORRECT
ANSWER yielded a higher return than expected for the level of risk assumed.
MM Proposition I without taxes proposes that: - CORRECT ANSWER leverage does
not affect the value of the firm
The increase in risk to shareholders when financial leverage is introduced is best
evidenced by: - CORRECT ANSWER a higher variability of EPS with debt than with all-
equity financing
QUESTIONS & VERIFIED CORRECT
ANSWERS
According to the pecking-order theory, a firm's leverage ratio is determined by: -
CORRECT ANSWER the firm's financing needs.
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
All else held constant, which one of these is most apt to increase the WACC of a
leveraged firm? - CORRECT ANSWER a decrease in the tax rate
The interest tax shield is a key reason why: - CORRECT ANSWER the net cost of debt
to a firm is generally less than the cost of equity
Financial executives place the greatest importance on which one of these factors when
setting dividend policy? - CORRECT ANSWER maintaining a consistent dividend policy
Which one of these is most related to a positive covenant? - CORRECT ANSWER
furnishing financial statements to the firm's lenders
The primary purpose of portfolio diversification is to: - CORRECT ANSWER .
eliminate asset-specific risk
MM Proposition II is the proposition that: - CORRECT ANSWER a firm's cost of equity
capital is a positive linear function of the firm's capital structure
Which one of these is a con of paying dividends? - CORRECT ANSWER Dividends are
frequently taxed as ordinary income
A stock with an actual return that lies above the security market line has: - CORRECT
ANSWER yielded a higher return than expected for the level of risk assumed.
MM Proposition I without taxes proposes that: - CORRECT ANSWER leverage does
not affect the value of the firm
The increase in risk to shareholders when financial leverage is introduced is best
evidenced by: - CORRECT ANSWER a higher variability of EPS with debt than with all-
equity financing
