Financial Management - Study Mode
[#1086] In capital asset pricing model, assumptions must be followed including
Correct Answer
(D) all of above
Explanation
Solution: In capital asset pricing model, assumptions must be followed including no taxes, no transaction costs and fixed quantities of assets.
[#1087] Two alternative expected returns are compared with help of
Correct Answer
(A) coefficient of variation
Explanation
Solution: Two alternative expected returns are compared with help of coefficient of variation. The coefficient of variation (CV) is a statistical measure of the dispersion of data points in a data series around the mean.
[#1088] Which of the following is not a feature of an optimal capital structure?
Correct Answer
(C) Control
Explanation
Solution: An optimal capital structure is the best combination of debt and equity financing that maximizes a company's market value and minimizes its overall cost of capital . Safety is a feature because a sound capital structure ensures the company can meet its obligations and reduces the risk of financial distress. Flexibility is important as it allows the firm to adapt its financing strategy in response to changing market conditions or business needs. Solvency is essential because a company must be able to meet its long-term financial commitments to remain financially healthy. Control , however, is not a defining feature of an optimal capital structure. While management may prefer to retain control, the primary objective is value maximization , even if it results in some dilution of control. Hence, the correct answer is Option C: Control .
[#1089] The growth in book value per share shows the_____________.
Correct Answer
(D) growth in reserves
Explanation
Solution: The growth in book value per share shows the growth in reserves. Book value of equity per share indicates a firm's net asset value (total assets - total liabilities) on a per-share basis.
[#1090] The overall capitalization rate and the cost of debt remain constant for all degrees of leverage. This is pronounced by __________.
Correct Answer
(B) Net operating income approach
Explanation
Solution: The correct answer is (B) Net operating income approach . Let's break down why: * Capitalization Rate: This is essentially the overall return a company needs to satisfy its investors. * Cost of Debt: This is the interest rate a company pays on its borrowings. * Leverage: This refers to how much debt a company uses to finance its operations. Now, let's look at the approaches: * (A) Traditional Approach: This approach suggests that the cost of capital initially decreases with leverage but eventually increases as debt becomes too high risk. So, it doesn't assume a constant capitalization rate. * (B) Net Operating Income (NOI) Approach: This approach assumes that the overall cost of capital (capitalization rate) and the cost of debt are constant , regardless of how much debt a company uses. It believes the value of the firm is determined by its operating income and not by its financing decisions. This matches the question's statement. * (C) Net Income Approach: This is an older, less realistic approach. It implies that the cost of equity is constant, which isn't generally true in real-world scenarios. * (D) MM Approach (Modigliani-Miller): This approach, in its initial form (without taxes), states that the value of a firm is independent of its capital structure. The version without taxes implies the cost of capital is constant. Later models with taxes modify this, but fundamentally, the NOI approach aligns more directly with the question's constant assumption. Therefore, the Net Operating Income (NOI) approach is the best fit because it explicitly states and assumes that the overall capitalization rate and cost of debt remain constant despite changes in leverage.