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The document outlines an examination for the course ELECTIVE 4 (MAC 412) at DAE, detailing questions related to long-term financing, capital structure, and financial management theories. It includes multiple-choice questions about common stocks, preferred stocks, and the implications of different financing options on a firm's capital structure. Additionally, it presents a scenario involving Adrow Corporation's capital structure and potential expansion financing.

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Orlando Vallente
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19 views2 pages

f38df1b6-8 2

The document outlines an examination for the course ELECTIVE 4 (MAC 412) at DAE, detailing questions related to long-term financing, capital structure, and financial management theories. It includes multiple-choice questions about common stocks, preferred stocks, and the implications of different financing options on a firm's capital structure. Additionally, it presents a scenario involving Adrow Corporation's capital structure and potential expansion financing.

Uploaded by

Orlando Vallente
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as TXT, PDF, TXT or read online on Scribd
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Student Name:

Course: ELECTIVE 4 (MAC 412) College: DAE


ID #:
Permit #:
Examination: SECOND EXAMINATION Term/Semester: 1st/1st
Page: 3/4 S.Y.
2023-2024
Total Points: 45
d. Basic control of the firm is not shared with the debt holders
Exam Date: 2023-09-06
18. One of the sources of long term financing is the issuance of common stocks. The
advantages (to the issuer) of issuing common stocks are as follows, except
a. The sale of common stock increases credit worthiness of the firm by providing
more equity b. Common stock cash dividends are not deductible as an expense
c. Common stock is frequently more attractive to investors than debt because it
grows in value with the success of the firm
d. Common stock dividends are not fixed they are paid from profit if available
19. Which of the following brings in additional capital to the firm?
a. Issuance of stock dividend
b. Two-for-one stock split
c. Exercise warrants
d. Conversion of convertible bonds to common stocks
20. It is a hybrid of debt and equity. It has a fixed charge and increases
leverage, but payment of dividends is not a legal obligation.
a. Preferred stocks
b. Common stocks
c. Bonds
d. Commercial paper
21. Which of the following is incorrect?
a. Capital structure is the mix of the long-term sources of funds used by the firm
b. Capital structure consists of the firm's long term financing debt and equity
c. The optimal capital structure is the combination of long-term debt and equity
that minimizes the cost of capital and value of the firm
d. Debt is cheaper than equity, but excessive use of debt increases the firm's risk
and drives up WACC
22. Statement 1: Capital structure is irrelevant in maximizing the value of the
firm and minimizing the overall cost of capital.
Statement 2: Optimal capital structure occurs at the point where the value of the
firm is the lowest and the cost of capital is the lowest.
a. True, True
b. False, True c. True, False
d. False, False
23. Statement 1: The trade-off theory of capital structure refers to the idea that
a company chooses much debt finance and how much equity finance to use by balancing
the costs and benefits.
Statement 2: The basic objective of financial management is to design an
appropriate structure which can provide the highest wealth which in turn depends on
EPS.
a. True, True
b. False, True c. True, False
d. False, False
24. At present, Adrow Corporation's capital structure is composed of 200,000 shares
of common stocks outstanding with a market price of P20 per share. It also has a P4
million in 8% bonds and P2 million in 10%, P10 par value preferred stocks, both
currently selling at par.
The company is considering a P3 million expansion program which can be financed
with: All common stocks at P20 per share
All bonds at 10% interest rate
• All preferred stocks
If the expansion program is undertaken, the company estimates that it can earn EBIT
of P2,000,000. The income tax rate is 30%.
umeas
© 2011 by Accounting Education, University of Mindanao
UM

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