HSMA 4055 QUIZ 5 REVIEW QUESTIONS AND ANSWERS
Which of the following are basic sources (forms) of capital? - CORRECT ANSWER✅✅Both a and b
(Debt and Equity)
The cost of debt capital to a business is measured by which of the following? - CORRECT
ANSWER✅✅Interest rate
Which of the following statements about short-term debt is most correct? - CORRECT
ANSWER✅✅Short-term debt generally has a lower cost than long-term debt.
Which of the following statements about debt contracts is most correct? - CORRECT ANSWER✅✅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 ANSWER✅✅The
ratings reflect the probability of default
Which of the following statements about common stock is incorrect? - CORRECT ANSWER✅✅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 ANSWER✅✅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 ANSWER✅✅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 ANSWER✅✅All of the above
, Which of the following statements about cost of capital estimation is most correct? - CORRECT
ANSWER✅✅None of the above statements is correct.
Which of the following statements regarding the cost of equity is most correct? - CORRECT
ANSWER✅✅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
ANSWER✅✅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 ANSWER✅✅True
True or false: Long-term debt is defined as having a maturity of more than six months. - CORRECT
ANSWER✅✅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 ANSWER✅✅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 ANSWER✅✅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
ANSWER✅✅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 ANSWER✅✅True
Which of the following are basic sources (forms) of capital? - CORRECT ANSWER✅✅Both a and b
(Debt and Equity)
The cost of debt capital to a business is measured by which of the following? - CORRECT
ANSWER✅✅Interest rate
Which of the following statements about short-term debt is most correct? - CORRECT
ANSWER✅✅Short-term debt generally has a lower cost than long-term debt.
Which of the following statements about debt contracts is most correct? - CORRECT ANSWER✅✅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 ANSWER✅✅The
ratings reflect the probability of default
Which of the following statements about common stock is incorrect? - CORRECT ANSWER✅✅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 ANSWER✅✅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 ANSWER✅✅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 ANSWER✅✅All of the above
, Which of the following statements about cost of capital estimation is most correct? - CORRECT
ANSWER✅✅None of the above statements is correct.
Which of the following statements regarding the cost of equity is most correct? - CORRECT
ANSWER✅✅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
ANSWER✅✅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 ANSWER✅✅True
True or false: Long-term debt is defined as having a maturity of more than six months. - CORRECT
ANSWER✅✅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 ANSWER✅✅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 ANSWER✅✅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
ANSWER✅✅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 ANSWER✅✅True
