Finance Ch 20/21 Quiz

A firm may obtain financial leverage by issuing bonds & issuing preferred stock
Successful use of financial leverage may increase the firm’s earning per share & investors’ return
The greater usage of financial leverage, the larger is the variability of net earnings
The higher the debt ratio, the greater is the use of financial leverage
Increase use of financial leverage may affect the firm’s credit rating and alter the firm’s earnings
The lower the debt ratio the lower the use of financial leverage
As a firm uses excessive amts. of debt financing, debt ratio increase, value of stock declines, cost of capital increases
Debt Financing… increases stockholder’s return more than equal dollar amt. of preferred stock, is less risky to the investor than preferred stock
If the captial asset pricing model is used, the cost of equity depends on the firm’s beta & the return on the market
If the dividend growth model is used, the cost of equity depends on the firm’s growth rate, the current dividend payment, the price of the stock
In the capital assets pricing model, the cost of equity is investors’ required return & includes the expected return on the market & the firm’s beta
Retained earnings are cheaper than the cost of new common stock
Marginal Cost of Capital refers to the cost of additional financing
The Optimal Capital Structure involves minimizing the weighted average of the cost of funds
A financial lease is similar to an operating lease b/c in both cases the lessee has the use of the asset
A firm may choose to lease if it is in a lower tax bracket & connot use the depreciation expense
If a firm leases instead of borrowing, it has use of the asset & losses the asset’s residual value

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