HSMA 4055 ACTUAL UPDATED
QUESTIONS AND CORRECT ANSWERS
Which of the following are basic sources (forms) of capital? - CORRECT
ANSWERS✅✅Both a and b
(Debt and Equity)
The cost of debt capital to a business is measured by which of the following? - CORRECT
ANSWERS✅✅Interest rate
Which of the following statements about short-term debt is most correct? - CORRECT
ANSWERS✅✅Short-term debt generally has a lower cost than long-term debt.
Which of the following statements about debt contracts is most correct? - CORRECT
ANSWERS✅✅Both a and b are correct.
Debt contracts have several different names.
Debt contracts typically contain restrictive covenants.
Which of the following statements about debt ratings is most correct? - CORRECT
ANSWERS✅✅The ratings reflect the probability of default
Which of the following statements about common stock is incorrect? - CORRECT
ANSWERS✅✅The claim of shareholders on the cash flows of the firm is limited to the
dividends that they receive—that is, they have no claim on a business's residual earnings.
Which of the following statements about the use of debt financing (financial leverage) is
incorrect? - CORRECT ANSWERS✅✅Capital structure theory allows managers to
precisely determine the optimal capital structure for any for-profit business.
Which of the following statements about the trade-off theory of capital structure is most
correct? - CORRECT ANSWERS✅✅The trade-off theory tells us that businesses should use
some debt financing, but not too much.
, Which of the following factors influence the estimate of a business's optimal capital
structure? - CORRECT ANSWERS✅✅All of the above
Which of the following statements about cost of capital estimation is most correct? -
CORRECT ANSWERS✅✅None of the above statements is correct.
Which of the following statements regarding the cost of equity is most correct? - CORRECT
ANSWERS✅✅Both a and b are correct.
Generic Health Services has a target capital structure of 30 percent debt and 70 percent
equity. Its cost of debt estimate is 10 percent and its cost of equity estimate is 16 percent. It
pays federal, state, and local taxes at a 40 percent marginal rate. What is the firm's corporate
cost of capital? - CORRECT ANSWERS✅✅13.0 percent
True or false: Although many factors influence the interest rate set on a loan, the two most
important are risk and inflation. - CORRECT ANSWERS✅✅True
True or false: Long-term debt is defined as having a maturity of more than six months. -
CORRECT ANSWERS✅✅False
True or false: Municipal bonds are essentially the same as corporate bonds. Thus, the coupon
(interest) rate set on a not-for-profit hospital bond will be the same (for all practical purposes)
as the rate set on a similar for-profit hospital bond - CORRECT ANSWERS✅✅False
True or false: A call provision allows bondholders to tender (turn in) their bonds at any time
and receive the principal amount in return. - CORRECT ANSWERS✅✅False
True or false: Although the use of financial leverage (debt financing) can increase the return
to the owners of a business, it also increases the riskiness of their equity investment. -
CORRECT ANSWERS✅✅True
True or false: To minimize the risk associated with debt financing, permanent assets (land,
buildings, and equipment) should be financed with long-term debt, while temporary assets
(such as a seasonal buildup in inventories) should be financed with short-term debt. -
CORRECT ANSWERS✅✅True
QUESTIONS AND CORRECT ANSWERS
Which of the following are basic sources (forms) of capital? - CORRECT
ANSWERS✅✅Both a and b
(Debt and Equity)
The cost of debt capital to a business is measured by which of the following? - CORRECT
ANSWERS✅✅Interest rate
Which of the following statements about short-term debt is most correct? - CORRECT
ANSWERS✅✅Short-term debt generally has a lower cost than long-term debt.
Which of the following statements about debt contracts is most correct? - CORRECT
ANSWERS✅✅Both a and b are correct.
Debt contracts have several different names.
Debt contracts typically contain restrictive covenants.
Which of the following statements about debt ratings is most correct? - CORRECT
ANSWERS✅✅The ratings reflect the probability of default
Which of the following statements about common stock is incorrect? - CORRECT
ANSWERS✅✅The claim of shareholders on the cash flows of the firm is limited to the
dividends that they receive—that is, they have no claim on a business's residual earnings.
Which of the following statements about the use of debt financing (financial leverage) is
incorrect? - CORRECT ANSWERS✅✅Capital structure theory allows managers to
precisely determine the optimal capital structure for any for-profit business.
Which of the following statements about the trade-off theory of capital structure is most
correct? - CORRECT ANSWERS✅✅The trade-off theory tells us that businesses should use
some debt financing, but not too much.
, Which of the following factors influence the estimate of a business's optimal capital
structure? - CORRECT ANSWERS✅✅All of the above
Which of the following statements about cost of capital estimation is most correct? -
CORRECT ANSWERS✅✅None of the above statements is correct.
Which of the following statements regarding the cost of equity is most correct? - CORRECT
ANSWERS✅✅Both a and b are correct.
Generic Health Services has a target capital structure of 30 percent debt and 70 percent
equity. Its cost of debt estimate is 10 percent and its cost of equity estimate is 16 percent. It
pays federal, state, and local taxes at a 40 percent marginal rate. What is the firm's corporate
cost of capital? - CORRECT ANSWERS✅✅13.0 percent
True or false: Although many factors influence the interest rate set on a loan, the two most
important are risk and inflation. - CORRECT ANSWERS✅✅True
True or false: Long-term debt is defined as having a maturity of more than six months. -
CORRECT ANSWERS✅✅False
True or false: Municipal bonds are essentially the same as corporate bonds. Thus, the coupon
(interest) rate set on a not-for-profit hospital bond will be the same (for all practical purposes)
as the rate set on a similar for-profit hospital bond - CORRECT ANSWERS✅✅False
True or false: A call provision allows bondholders to tender (turn in) their bonds at any time
and receive the principal amount in return. - CORRECT ANSWERS✅✅False
True or false: Although the use of financial leverage (debt financing) can increase the return
to the owners of a business, it also increases the riskiness of their equity investment. -
CORRECT ANSWERS✅✅True
True or false: To minimize the risk associated with debt financing, permanent assets (land,
buildings, and equipment) should be financed with long-term debt, while temporary assets
(such as a seasonal buildup in inventories) should be financed with short-term debt. -
CORRECT ANSWERS✅✅True
