Finance Flashcard

Front

Which of the following statements is true of the capital structure of companies in Germany? Companies in Germany use the lowest proportion of debt of industrialized countries., Companies in Germany use only equity to finance their projects., The corporate debt raised by companies in Germany mostly consists of publicly issued bonds., Debt monitoring costs are high in Germany because of stringent audit requirements., Companies in Germany raise most of their corporate debt through bank loans.

Back

Companies in Germany raise most of their corporate debt through bank loans.

Front

The weighted average cost of capital of a firm represents the ____.

Back

minimum rate of return a firm must earn on average-risk investments to maintain its current value

Front

In countries where capital gains are not taxed, investors should prefer to own stocks rather than debt compared to investors in countries where capital gains are taxed.

Back

True

Front

Which of the following is a major assumption that is embedded in the capital asset pricing model (CAPM), which is often used to estimate the cost of retained earnings, rₛ?
Options:
All investors are well diversified.
The firm's dividends and earnings grow at a constant rate far into the future.
The firm's cost of equity and its cost of debt are always equal.
The firm's cost of retained earnings must be less than its cost of preferred stock for the CAPM to provide a reasonable estimate for rₛ.
Investors primarily purchase stocks with beta coefficients equal to zero.

Back

All investors are well diversified.

Front

For a particular firm, depending on tax rates, flotation costs, and the attitude of investors, the cost of new common equity, rₑ, can be less than, equal to, or greater than its before-tax cost of debt, rₒ.

Back

False

Front

The optimal capital structure is the capital structure that strikes a balance between risk and return such that the firm's stock price is maximized. True or False?

Back

True

Front

Everything else equal, an asset's value is _____.

Back

inversely related to the rate of return investors require to purchase it

Front

Symmetric information is defined as the situation in which ______.

Back

investors and managers have identical information about the firm's prospects

Front

The rates of return, or costs, that a firm must pay to raise funds to invest in capital budgeting projects are determined by the _____?

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investors who purchase the firm's stocks and bonds in the financial markets

Front

In the United States, equity monitoring costs are lower than most other developed countries.

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True