Question 1

Molly has been very aggressive in her investment strategy and is currently invested in lower-quality common stocks.What type of investment would you recommend to Molly if she says she wants to move down one notch in risk?

Accepted Answer

Junk bonds and high-quality cyclical common stocks

Question 2

What is the difference between debt and equity financing?

Accepted Answer

Debt financing is riskier than equity financing because with debt financing debts are incurred which must be paid back.

Question 3

A manufacturing company is planning to go international.If the following facts were known,which one would weaken the case that the company should acquire the needed capital through debt financing?

Accepted Answer

Its international business will grow slowly for the first several years.

Question 4

If Sunshine Tanning's founders invested $10 000 by buying the original 500 shares at $20.00 per share in 1994 and then raised $50 000 by selling 500 more shares at $100 per share,the additional paid-in capital would bring shareholder's equity to

Accepted Answer

$60 000

Question 5

Samantha should prepare a cash flow requirements projection for her business because

Accepted Answer

by anticipating shortfalls,she can seek funds in advance and minimize their cost,and by anticipating excess cash she can plan to put funds to work in short-term,interest-bearing investments.

Question 6

Using retained earnings as a source of equity financing has one major disadvantage,which is

Accepted Answer

the shareholders' dividends may decline.

Question 7

Maury is currently invested in medium-quality preferred stock.What type of investment would you recommend to Maury if he says he wants to move up one notch in risk?

Accepted Answer

High-quality,cyclical common stocks

Question 8

Which of the following would be a likely result of using retained earnings to provide long-term funds?

Accepted Answer

Smaller dividends to shareholders and the company's stock price may drop

Question 9

Price Steel issued 1000 common shares at a price of $15.00 each.If all the shares sold,Algoma could expect to raise

Accepted Answer

$15 000.

Question 10

A German manufacturing company is planning to go international.If the following facts were known,which one would strengthen the case that the company should acquire the needed capital through equity financing?

Accepted Answer

Venture capitalists have expressed great interest in the company.

Question 11

Adrianna decided to purchase preferred shares because

Accepted Answer

it has some of the features of corporate bonds and some features of common stock.

Question 12

A manufacturing company is planning to go international.If the following facts were known,which one would strengthen the case that the company should acquire the needed capital through debt financing?

Accepted Answer

It will have a new,steady stream of revenue from its international sales.

Question 13

Falling somewhere between debt and equity financing,________ are also referred to as ___________.

Accepted Answer

preferred shares; hybrid financing

Question 14

Guy is very conservative in his investing and holds mostly government savings bonds and bank GICs.What type of investment would you recommend to Guy if he says he wants to move up one notch in risk?

Accepted Answer

High-grade corporate bonds and commercial paper

Question 15

What is the capital structure of a firm?

Accepted Answer

The mix of debt and equity in the firm's financial base

Question 16

Bake-Loc is considering issuing corporate bonds in order to raise money.If the following facts are known,which one would strengthen the case for issuing bonds?

Accepted Answer

The company has debts that need to be paid immediately.

Question 17

Equity financing via common stock can be more expensive than issuing bonds because

Accepted Answer

interest paid to bondholders is a tax-deductible business expense,but stock dividends are not tax-deductible.

Question 18

What are the two factors that are used to determine where a specific financial instrument will be placed on the risk-return continuum?

Accepted Answer

The size of the financial returns that must be offered to induce investment and the uncertainty about financial returns on investments

Question 19

All of the following are reasons for new start-up businesses being under-funded except

Accepted Answer

entrepreneurs rely too much on equity financing and not enough on debt financing.

Question 20

Beta Corp.is considering an IPO in order to raise money.If the following facts were known,which one would strengthen the case for doing an IPO?

Accepted Answer

The company has a healthy list of assets.

Quiz 20: Financial Decisions and Risk Management