FIN 650 GC WEEK 6 EXAM 2 LATEST

Other things held constant, which of the following events is most likely to encourage a firm to increase the
amount of debt in its capital structure?
Its sales become less stable over time.
The costs that would be incurred in the event of bankruptcy increase.
Management believes that the firm’s stock has become overvalued.
Its degree of operating leverage increases.
The corporate tax rate increases.
Question 3. Reynolds Paper Products Corporation follows a strict residual dividend policy. All else equal,
which of the following factors would be most likely to lead to an increase in the firm’s dividend per share?
The firm’s net income increases.
The company increases the percentage of equity in its target capital structure.
The number of profitable potential projects increases.
Congress lowers the tax rate on capital gains. The remainder of the tax code is not changed.
Earnings are unchanged, but the firm issues new shares of common stock.
Question 4. Burnham Brothers Inc. has no retained earnings since it has always paid out all of its
earnings as dividends. This same situation is expected to persist in the future. The company uses the
CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred
stock, and debt. Which of the following events would REDUCE its WACC?
The flotation costs associated with issuing new common stock increase.
The company’s beta increases.
Expected inflation increases.
The flotation costs associated with issuing preferred stock increase.
The market risk premium declines.
Question 5. Based on the corporate valuation model, the value of Weidner Co.’s operations is $1,200
million. The company’s balance sheet shows $80 million in accounts receivable, $60 million in inventory,
and $100 million in short-term investments that are unrelated to operations. The balance sheet also