Which of the follwong is a true statement about Risk Capital or Owner's Equity? There is no legal obligtion to pay it back It is usually the largest asset held by a firm O If dividands are not paid in a consistant and timely fashion the shareholders can force the firm into bankrupcy, O It is a much riskier means of financing an embrionic organization than debt. All of the above are correct statements
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- Which of the following statement is false? a. None of above b. The capital structure should be flexible. c. A firm having operating loss would find it worthwhile to incorporate debt in the capital structure in a greater measure. d. The use of excessive debt threatens the solvency of the company.Balance Sheet Insolvency occurs when Liabilities are greater than the Assets resulting in negative capital equity. For a Financial Institution, Insolvency Risk can be defined as the risk that there is insufficient capital to offset either a decrease in the market value of assets relative to liabilities or an increase in liabilities relative to the market value of assets. A. Describe a situation where Insolvency Risk could be caused one of the many risks that a Financial Institution may face. B. Describe the best protection against insolvency risk at a Financial Institution.Which of the following statements is false? The cost of debt securities is highest due to their relatively low risk The cost of common stock is highest due to its relatively high risk The cost of preferred stock falls somewhere between debt and common stock None of the above Capital budgeting is the decision making process used in the acquisition of long term physical assets True False Which of the following statements are true regarding the payback period of an investment? It does not account for the time value of money No objective criteria exists for what is an acceptable payback period Cash flows occurring after the payback period have no impact on the payback computation All of the above The method that measures a projects return based on present values is the: Internal Rate of Return Discounted Payback Period Modified Internal Rate of Return None of the Above
- The company cost of capital depends on current profits and cashflows, which measures what investors require from the company: A) True B) False Corporate debt can be dependable or risky, which depends on the value and the risk of the firm's assets. Bondholders can take steps to eliminate default risk: A) true B) FalseWhich of the following statements is FALSE? A. Equity cost of capital is normally higher then cost of debt, thus cost of debt can be examined in isolation. B. No matter if a firm is unlevered or levered, there is no difference in the market value of the firms total securities and market value of the firm’s assets. C. Introducing debt increases the risk even though it may be cheap and consequently increases firms equity cost of capital. D. Cost of Capital of equity and Leverage can be explicitly explained by first proposition that Modigliani and Miller introduced.Which of the following statements is FALSE? As debt increases, the risk associated with bankruptcy and agency costs is reduced. Debt is often the least costly form of financing for a firm. Firms should probably use some debt in their capital structure. Different firms are subject to different levels of risk.
- Which of the following is NOT an acceptable basis on which to measure an expense? A cash outflow. O A pro rata measure. O An estimation. O All of these options are acceptable. O An invoice price. Which of the following is a likely explanation as to why preparers would choose to deliberately understate the reported profit of a listed entity? O To reduce investors' expectations of future earnings. O To decrease the entity's weighted average cost of capital. To reduce the entity's tax liability. O To satisfy the qualitative characteristic of faithful representation. O All of these are likely explanations why preparers would deliberately understate the reported profit.What are the TWO primary advantages of using CAPM over DDM? It adjusts for risks It does not explicitly consider risk Applicable to companies that pay steady dividends Applicable to companies that pay no dividendsExplain what is meant by the term ‘financial distress’. If we assume that financial distress exists, explain how and why financial distress would cause a firm’s equity to become riskier.
- “Having zero debt in the firm’s capital structure is not an ideal scenario.” Do you agree withthis statement? ExplainA common feature of an LBO structure is a. the minimal use of debt financing. b. a cash sweep, which is a covenant requiring all excess cash be used to retire debt.c. projected rates of return that explicitly and precisely account for the risks associated with these investments.d. its limited use in only providing seed capital to start-up firms.e. none of the above.(1) What factors might lead a company to gainadditional funds through debt financing rather thanthrough equity financing? (2) Why does consumerdebt have a more negative connotation than businessdebt?