Question

HELLO, PLEASE SELECT THE CORRECT ANSWER:

1. If a firm wants to maintain its present ratio of debt to equity, its present dividend payout ratio, and does not want to sell any new equity, the firm's growth rate in sales and assets must be less than or equal to its:
A. dividend payout ratio.
B. retention ratio.
C. sustainable growth rate.
D. growth rate with no external financing.
E. projected sales growth rate.

2. All else the same, the level of external financing needed (EFN) increases with increases in the:
A. Profit margin.
B. Retention ratio.
C. Accounts receivable turnover ratio.
D. Capital intensity ratio.
E. Fixed asset utilization ratio.

3. A publicly traded Toronto firm has decided to issue 1 million new shares of common stock at the current market price of $10 per share. An underwriting syndicate pays the firm $9.3 million for the entire issue and then markets the shares at $10 each. This is an example of a(n):
A. Indirect cost.
B. Lock-up agreement pricing.
C. Firm commitment underwriting.
D. A best-efforts underwriting.
E. An underpricing situation.

4. Which of the following apply to levered firms but not to unlevered firms?
I. Financial risk
II. Systematic risk
III. Business risk
IV. Interest tax shield
A. I only
B. I and IV only
C. II and III only
D. II, III, and IV only
E. I, II, and IV only

Answer 1

1). option c - sustainable growth rate is that growth rate which a firm can keep up with, without raising more funds and still maintaining the same dividend payout ratio.

2). option d - EFN will increase with an increase in capital intensity ratio (total assets/sales) since assets will have to increase to keep pace with the forecasted sales.

3). option c - This is an example of a firm commitment underwriting where the underwriting syndicate purchases the entire issue and then sells it in the market.

4). option b - A levered firm will face financial risk and interest tax shield.