1.
Capital gains to stockholders neither enter into the calculation of the value of the firm, nor the value of the common stock of the firm.
A) True
B) False
2.
The rise of institutional capitalism (as defined in the lecture) has further lessened the pressures on management to maximize shareholder value.
A) True
B) False
3.
The SEC ruling in the early ’90s pertaining to stock owned by financial institutions reduced the ability of those institutions to influence the governance of the corporation in which they owned stock.
A) True
B) False
4.
When companies rely upon retained earnings to finance expansion, it lessens the influence of capital market forces on those corporate decisions.
A) True
B) False
5.
Allowing dividends to be deducted from profits to arrive at taxable income, just as interest on debt has been treated, will tend to reduce the dividend payment from after-tax profits.
A) True
B) False
6.
Allowing dividends to be deducted from profits to arrive at taxable income, just as interest on debt has been treated, will tend to reduce the degree of financial or debt leverage employed by corporations.
A) True
B) False
7.
Profit satisficing, rather than profit maximizing, is more consistent with the increasing rise in the percentage of corporate stock owned by institutional investors.
A) True
B) False
8.
Excessive management compensation is less likely to occur as the percent of stock owned by institutional investors increases.
A) True
B) False
9.
In determining accounting profits, to the extent that expenditures generate revenues in future periods, they should be capitalized, not expensed.
A) True
B) False
10.
Excessive accruals of revenues tend to understate profits, rather than overstate them for a given accounting period.
A) True
B) False
11.
Failure to accrue expenses that generate revenues in the current period is more likely to overstate profits than to understate them.
A) True
B) False
12.
A positive cash flow during an accounting period cannot occur unless there are accounting profits for the same period.
A) True
B) False
13.
If a firm reports accounting profits during a period, there need not be a positive cash flow for the period.
A) True
B) False
14.
Depreciation is an example of a noncash charge.
A) True
B) False
15.
Estimates are necessary in capital budgeting based on discounted cash flows, but are not necessary for accounting for profits on an accrual basis.
A) True
B) False
16.
The market price of a stock is not affected by the expectations of future profits of the firm.
A) True
B) False
17.
The rate of discount used to determine the value of an average share of stock would be higher than the rate of discount on the average bond.
A) True
B) False
18.
Market Value Added (MVA) is more dependent upon balance sheet ratios for its determination than is Total Return to Shareholders (TRS).
A) True
B) False
19.
As interest rates rise persistently and significantly, the rate of discount in determining share price is more likely to be falling than rising.
A) True
B) False
20.
If the Efficient Market Hypothesis (EMH) is valid, the use of historical data by stock analysts is more likely to improve the accuracy of his or her recommendation than if he or she did not use it.
A) True
B) False
21.
The validity of indexing a portfolio to improve long-term rates of return is proven to be unjustified to the extent that the Efficient Market Hypothesis (EMH) is valid.
A) True
B) False
22.
The greater depreciation expense is, the lesser are a firm’s profits and the cash flow for the period in question.
A) True
B) False
23.
Efficient diversification by investors reduces a stock’s systematic risk but does not affect its unsystematic risk.
A) True
B) False
24.
The higher a firm’s use of debt or financial leverage, the more volatile is the firm’s return on equity.
A) True
B) False
25.
Firms that operate in highly cyclical markets tend to have higher costs of capital than do firms that operate in markets that are not significantly affected by business fluctuations.
A) True
B) False
26.
A higher return on invested capital or ROIC usually results in higher cash flows.
A) True
B) False
27.
Growth in the value of a firm is reduced if the ROIC is less than the cost of capital.
A) True
B) False
28.
If a firm has a high ROIC but low growth, it will benefit more from seeking an even higher ROIC than on a strategy of more rapid growth.
A) True
B) False
29.
Expanding a firm’s portfolio of products is usually less expensive than attempting to expand its market share of its existing products.
A) True
B) False
30.
Acquisition of other successful firms is usually the cheapest way to expand ROIC. ?
A) True
B) False
31.
The Principle of Value states that anything that does not increase cash flow does not increase value.
A) True
B) False
32.
Changing capital structure can create value even if it does not increase cash flow.
A) True
B) False
33.
Prior to the relatively recent change in the tax treatment of corporate dividends, an increase in the degree of debt leverage increased the cash flow but also increase the risk of bankruptcy.
A) True
B) False
34.
An entrenched management with little independent stockholder pressure, and following a behavior of profit satisficing rather than maximizing shareholder value, could rationally choose a strategy of expansion even if that expansion did not increase cash flow.
A) True
B) False
35.
Efficient diversification of a portfolio reduces unsystematic risk but does not alter systematic risk.
A) True
B) False
36.
Changing from straight-line depreciation to accelerated depreciation for tax purposes reduces the cash flow of the firm.
A) True
B) False

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