Financial Management - Study Mode
[#726] Which of the following is an argument for the relevance of dividends?
Correct Answer
(D) All of the above.
Explanation
Solution: Informational content, Reduction of uncertainty and Some investors' preference for current income is an argument for the relevance of dividends.
[#727] Which of the following is/are false regarding capital structure theory as stated by Miller and Modigliani? 1) If agency costs are considered, the expected agency costs increases as the debt-equity ratio decreases. 2) With the given assumptions, there is no optimal capital structure. 3) In the presence of taxes, the market value of the firm decreases by the tax shield of debt
Correct Answer
(D) All the three statements.
Explanation
Solution: The Modigliani-Miller theorem (M&M) states that the market value of a company is calculated using its earning power and the risk of its underlying assets and is independent of the way it finances investments or distributes dividends. There are three methods a firm can choose to finance: borrowing, spending profits (versus handing them out to shareholders in the form of dividends), and straight issuance of shares. While complicated, the theorem in its simplest form is based on the idea that with certain assumptions in place, there is no difference between a firm financing itself with debt or equity.
[#728] Financial risk is most associated with_______________.
Correct Answer
(B) the use of debt financing by corporations
Explanation
Solution: Financial risk is most associated with the use of debt financing by corporations. Financial risk is the risk that a company won't be able to meet its obligations to pay back its debts. Which in turn could mean that potential investors will lose the money invested in the company. The more debt a company has, the higher the potential financial risk.
[#729] Retained earnings are ?
Correct Answer
(D) the cumulative earnings of the company after dividends.
Explanation
Solution: Retained earnings are the cumulative earnings of the company after dividends. Retained earnings are the profits that a company has earned to date, less any dividends or other distributions paid to investors. This amount is adjusted whenever there is an entry to the accounting records that impacts a revenue or expense account.
[#730] Which of the following factors does not affect the capital structure of a company?
Correct Answer
(B) Composition of the current assets
Explanation
Solution: Composition of the current assets does not affect the capital structure of a company. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets.