Understanding the financial environment of corporations

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Reference no: EM132057360

1. Financial ratios are employed in understanding the financial environment of corporations. Which one of the following is not a correct use of financial ratios?

a) Capture the behavior of ratios across time

b) Comparison of relationships across ?nancial-statement line items

c) Comparison of ratios with similar ?rms

d) Capture the risk inherent in the stock market

e) Capture trends in the relationship among variables

2. There are many ways to calculate the components of the WACC. Which of the following is not a valid methodology?

a) Yield to maturity on debt issued by comparable companies

b) Capital asset pricing model to find the cost of equity

c) Net present value to find the cost of debt

d) Yield to maturity on existing debt to find the cost of debt

e) Dividend growth model to find the cost of equity

3. Business risk is defined as the:______

a. equity risk that comes from the nature of a firm’s operating activities.

b. equity risk associated with the capital structure of a firm.

c. probability that a firm will file bankruptcy.

d. situation in which a firm causes its creditors to suffer a financial loss.

4. The cost of equity is the rate of return the marginal stockholder requires on the firm's common stock.

a. true

b. false

Reference no: EM132057360

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