Financial Management - Study Mode
[#981] 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.
[#982] 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.
[#983] International investing is________________.
Correct Answer
(C) always leads to higher returns than a domestic portfolio
Explanation
Solution: International investing is always leads to higher returns than a domestic portfolio. International investing is an investing strategy that involves selecting global investment instruments as part of an investment portfolio.
[#984] Which of the following is not an assumption in the Miller & Modigliani approach?
Correct Answer
(D) All the firms pay tax on their income at the same rate
Explanation
Solution: All the firms pay tax on their income at the same rate is not an assumption in the Miller & Modigliani approach. The Modigliani and Miller Approach further states that the market value of a firm is affected by its operating income, apart from the risk involved in the investment. The theory stated that the value of the firm is not dependent on the choice of capital structure or financing decisions of the firm.
[#985] Mr. A is a daring portfolio manager. He wants to increase the return in his portfolio. He should choose stocks from_______________.
Correct Answer
(B) industry at a growth stage
Explanation
Solution: Mr. A is a daring portfolio manager. He wants to increase the return in his portfolio. He should choose stocks from industry at a growth stage.