Finanxe - exam true/false questions

A corporation is directly involved in and receives the proceeds from the transaction on the secondary market.

False. Corporations only receive proceeds from the primary market.

. Financial assets include the direct ownership of tangible assets such as land or buildings.

False. Financial assets are rather intangible and do not take up physical worth like tangible assets. Financial assets represent claims against the income and assets of those who issued the claims.

Debentures are unsecured promissory notes that are supported by the general creditworthiness of the issuing company.

True

D means the prime quality (bank investments quality) in S&P’s bonds rating.

False. D represents the worst category in S&P’s bond rating and the worth credit worthiness.

Zero coupon bonds always sell at face value (par value).

False. They always sell less than the par value because that is the only way to make a return for zero coupon bonds.

If a firm fails to pay a common stock dividend, the dividend is said to be in arrears.

False. This is only applicable to preferred stock and their dividends.

The effective interest rate is always greater than the nominal (annual) interest rate whenever compounding occurs more than once per year.

The more times you compound per year the larger is the interest rate.

Book value per share is the actual amount per share of common stock to be received if all of the firm’s assets were sold for their market values, liabilities were paid, and any remaining funds were divided among common stockholders.

True

The current yield measures the compound annual return to an investment and considers all bonds cash flows.

True

Operating leverage results from the capital structure (long-term debt / equity).

False.

Only those companies which use neither debt nor other forms of fixed cost financing (like preferred stock) will experience financial leverage.

False

The higher debt, the lower financial leverage degree.

False. The more debt financing a company uses, the higher its financial leverage.

The higher debt, the lower financial leverage degree.

False. The more debt financing a company uses, the higher its financial leverage.

Business risk is the risk to the firm of being unable to cover operating costs.

True

Asymmetric information can impact the firm’s capital structure as follows: management will raise the funds using debt since they believe/know the stock is overvalued.

True

The principal goal of the financial manager is to maximize shareholder value.

True

The NPV and IRR method are always consistent when the investment projects are ranked (when project A is chosen as the best with NPV methods it is also indicated as the best with IRR method).

False

When the firm has positive net working capital it means that the portion of firms fixed assets is financed with current liabilities.

False

In capital budgeting the Operating Cash Inflows are incremental and calculated before-tax.

False. They are calculated in an after tax basis.

Regular dividend policy is based on the assumption that dividend is always a fixed percentage of earnings available for common shareholders

It depends but most likely False. Regular dividend policy can differ per corporation and even if dividends are provided (as the corporation can also not provide any)

If the managers think their company’s share are undervalued they prefer stock-financing.

False. They would prefer debt financing because if they used stock financing then they would incur an opportunity of that spread between their valuation and the market share price. Refer to Pecking Order Theory.