Rahul Gupta (Project Controller ACA MBA(Fin.)) 17 May 2010
1) Which one of the following statements can be made about a company that has no fixed interest payment obligations?
A) Its degree of financial leverage will be 1.0, which means that the company will have no financial risk.
B) Its degree of financial leverage will be less than 1.0 if the company charges interest on its overdue receivable accounts.
C) Its degree of financial leverage will be more than 1.0 if the company charges interest on its overdue receivable accounts.
D) Its degree of financial leverage will be zero, which means that the company bears no financial risk whatsoever.
2) Which of the following statements contradicts the likely outcomes as a result of the "clientèle effect"?
A) Low dividend paying stocks will tend to attract investors in higher tax brackets.
B) Clients prefer dividends because they are more certain than the potential for capital gains in the future; a cut in dividends will result in a negative clientele effect.
C) Stocks with no internal growth will tend to attract investors who prefer high dividends.
D) Different groups of investors have different preferences for dividends; if a firm changes its dividend policy, it will lose one group of investors and simultaneously attract another group, keeping its share prices stable.
3) Which of the following statements with respect to risk analysis techniques is untrue?
A) Sensitivity analysis illustrates the impact on the dependent variable by only changing one independent variable, while holding all other independent factors constant.
B) Monte Carlo simulation will run the greatest number of scenarios, with each scenario having nothing held constant.
C) Scenario analysis requires the calculation of a few possible outcomes, which is followed by the assignment of probabilities of these various outcomes actually occurring.
D) The advantage that a Monte Carlo analysis has over the other techniques is that it does away with the need to assign subjective probabilities to the various random variables.
A) I, II and IV only
B) IV only
C) I, II, III and IV
D) II and IV only
A) I and IV only
B) III and IV only
C) II and III only
D) III only
A) I and IV only
B) III and IV
C) I, II, III and IV
D) I, II and IV only
A) I, II, III and IV
B) II and IV only
C) I, III and IV only
D) I and IV only
9) The market value of XYZ Corp.'s common equity is currently $600 million and the market value of its debt is $400 million. The cost of equity is estimated at 12% and the before-tax cost of debt is estimated at 8%. Suppose that the company wishes to raise an additional $150 million to finance its expansion; it estimates the debt will now cost them 9% (before tax) and the equity will cost 14%. The company's tax rate is 40%. If the company wishes to maintain its existing capital structure, what will the company's new WACC and marginal cost of capital be?
A) New WACC: 10.56% Marginal cost of capital: 1.44%
B) New WACC: 9.12% Marginal cost of capital: 15.3%
C) New WACC: 10.56% Marginal cost of capital: 15.8%
D) New WACC: 12.0% Marginal cost of capital: 14.7%
Which of the following statements is least accurate with respect to the impact operating leverage will have on the financial profile of a company?
A) A high operating leverage is evident if a greater proportion of a firm's cost structure is fixed.
B) As operating leverage increases, a small percentage change in sales will have a bigger impact on EBIT.
C) As operating leverage increases, a small percentage change in EBIT will have a bigger impact on net income.
D) The higher the operating leverage of a company, the higher will be the sales break-even point.
Best of luck