Business Finance 4

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1. One common reason for issuing two distinct classes of common stock is to:

  • Restrict voting privileges from some shareholders
  • Conserve cash by offering dividends to only one class of stockholder
  • Sell different classes to increase profits
  • Allow one stock to increase in price while the other declines
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2. As debt is added to the capital structure, the:

  • Cost of debt can be expected to rise
  • WACC will continually decrease
  • WACC will continually increase
  • WACC will be unaffected

3. Why should managers assume they will receive a fair price for any new shares?

  • Financial markets are highly competitive
  • All new shares will sell as positive NPV investments
  • New share prices are highly regulated
  • All new shares must sell at par value

4. If a company's cost of capital is less than the required return on equity, then the firm:

  • Is all equity financed
  • Is financed with more than 50% debt
  • Has debt in its capital structure
  • Is perceived to be safe

5. When the real rate of interest is less than the nominal rate of interest, then:

  • Investment returns cannot increase the purchasing power of an investment
  • Disinflation must be occuring
  • The rate of inflation must be positive
  • Nominal flows should be discounted with real rates
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