CFIN 5 TEST QUESTIONS WITH ALL CORRECT ANSWERS
A firm with substantial fixed costs such as manufacturing overhead will have a higher degree of risk in the trough of a business cycle than will a firm with high variable costs and limited fixed costs (T/F) - Answer- true
The efficient market theo...
A firm with substantial fixed costs such as manufacturing overhead will have a higher
degree of risk in the trough of a business cycle than will a firm with high variable costs
and limited fixed costs (T/F) - Answer- true
The efficient market theory seems reasonable because: a. there are hundreds of
financial analysts valuing securities, b. there are hundreds of investors trying to make
money from improperly valued securities, and the market forces which result drive stock
prices to a fair value, c. statistical assessments are becoming increasingly important in
financial analysis - Answer- A, B and C
The risk of illiquidity is more pronounced for debt holders than it is for share owners in a
public company - T/F - Answer- true
A firm's marginal cost of capital can be used as its average hurdle rate because: a. the
cost of capital is exactly what it would cost the firm to go to the markets to raise its next
dollar of debt or equity, b. the terms are synonymous, c. it is a composite figure which
represents the average risk of the firm - Answer- C- it is a composite figure
If an analyst uses the percentages of debt and equity on a firm's balance sheet and the
interest charges from its income statement to calculate the cost of capital, then: a. a
marginal cost will result, b. the target weighted average will result, c. the current
weighted average will result, d. the marginal target cost of capital will result - Answer-
current weighted average will result
Which of the following statements about bonds is always true? a. a bond's yield to
maturity is equal to its coupon rate, b. the yield to maturity is equal to the internal rate of
return of a bond's cash flows, c. the higher the rating on a bond the higher its rate of
interest, d. bonds are of higher risk to investors than stock - Answer- B - the YTM is
equal to the IRR
The price of a bond can be determined by discounting the remaining coupons and value
at maturity by a factor which is equal to the prevailing yield to maturity earned on bonds
of similar risk. T/F - Answer- true
Firms that payout a large portion of their earnings in dividends will have a higher cost of
equity than firms that pay no dividends T/F - Answer- false
The risk-free rate of return used to determine a firm's cost of capital will vary depending
upon the financial and operating risk level of the firm. T/F - Answer- false
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