Multiple Choice Questions
1. Which of
the following statements is most correct?
a. The tax
preference theory states that, all else equal, investors prefer stocks that pay
low dividends because retained earnings can lead to capital gains that are
taxed preferentially.
b. An
increase in the cost of equity capital (rs) when a company announces an
increase in its dividend per share would be consistent with the
bird-in-the-hand theory.
c. An
increase in the stock price when a company decreases its dividend is consistent
with the signaling theory.
d. A
dividend policy that involves paying a consistent percentage of net income is
the best policy if the “clientele effect” is correct.
e. Both
statements a and d are correct.
2. Errors in
the sales forecast can be offset by similar errors in costs and income
forecasts. Thus, as long as the errors are not large, sales forecast accuracy
is not critical to the firm.
a. True
b. False
3. Others
things held constant, which of the following will cause an increase in working
capital?
a. Cash is
used to buy marketable securities.
b. A cash
dividend is declared and paid.
c. Merchandise
is sold at a profit, but the sale is on credit.
d. Long-term
bonds are retired with the proceeds of a preferred stock issue.
e. Missing
inventory is written off against retained earnings.
4. Which of
the following statements is most correct?
a. The
bird-in-the-hand theory would predict that companies could decrease their cost
of equity financing by raising their dividend payout.
b. The
clientele effect can explain why firms often change their dividend policies.
c. One
advantage of adopting a residual distribution policy (with all distributions in
the form of dividends) is that it makes it easier for corporations to maintain
dividend clienteles.
d. Answers a
and c are correct.
e. None of
the answers above is correct.
5. The
firm’s business risk is largely determined by the financial characteristics of
its industry.
a. True
b. False
6. Which of
the following statements is most correct?
a. The
primary test of feasibility in reorganization is whether every claimant agrees
with the reorganization plan.
b. The basic
doctrine of fairness states that all debt holders must be treated equally.
c. Since
the primary issue in bankruptcy is to determine the sharing of losses between
owners and creditors, the “public interest” is not a relevant
concern.
d. While the
firm is in bankruptcy, the existing management is always allowed to remain in
control of the firm, though the court monitors its actions closely.
e. To a
large extent, the decision to dissolve a firm through liquidation or to keep it
alive through reorganization depends on a determination of the value of the
firm if it is rehabilitated versus the value of its assets if they are sold off
individually.
7. Which of
the following statement is most correct?
a. If a
company increases its current liabilities by $1,000 and simultaneously
increases its inventories by $1,000, its current ratio must rise.
b. If a
company increases its current liabilities by $1,000 and simultaneously
increases its inventories by $1,000, its quick ratio must fall.
c. A
company’s quick ratio may never exceed its current ratio.
d. Answers b
and c are correct.
e. None of
the answers above is correct.
8. Which of
the following would increase the likelihood that a company would increase its
debt ratio in its capital structure?
a. An
increase in costs incurred when filing for bankruptcy.
b. An
increase in the corporate tax rate.
c. An
increase in the personal tax rate.
d. A
decrease in the firm’s business risk.
e. Statements
b and d are correct.
