1. Tax deductibility is a characteristic of: Debt Equity 2. EPS dilution is a ch
ID: 2754746 • Letter: 1
Question
1. Tax deductibility is a characteristic of:
Debt
Equity
2. EPS dilution is a characteristic of:
Debt
Equity
3. Debt cost is:
Low
High
4. Increased risk is a characteristic of:
Debt
Equity
5. The return on equity is:
Fixed
Variable
6. Discuss financial ratios and their usefulness, and then talk about what to do if they don’t necessarily follow the company or industry norm.
7. Give an example of a negative ratio, an undefined ratio or a zero ratio and what could make that occur.
8. Which is the correct descending order of priority of rights in liquidation?
preferred stockholders, senior creditors, common stockholders, government for past due taxes, subordinated creditors
subordinated creditors, preferred stockholders, common stockholders, government for past due taxes, senior creditors
senior creditors, subordinated creditors, government for past due taxes, preferred stockholders, common stockholders
government for past due taxes, senior creditors, subordinated creditors, preferred stockholders, common stockholders
9. Discuss market efficiency and the difference between weak form efficient, semi-strong form efficient and strong form.
10. Most markets are considered semi-strong form efficient, which means you generally cannot make money trading on _______________ information; trading on insider information, however, can be lucrative.
11. Define the "interest tax shield" and explain how it works with debt financing.
12. What is the ratio used to calculate the "interest tax shield?"
13. When will an "interest tax shield" not help a company?
14. Discuss how Scott’s Miracle Grow recapitalization turned out in the down economy of ’08-09. Specifically: The executives for Scott's, in the author’s estimate, doubled their debt, to buy back 17 million shares of common stock, in order to ratchet up the EPS, which is a key determinant of bonuses. Since this is a closed book exam, tell me what you remember in general terms.
15. From the Scott's executives’ standpoint, how did THEY do?
16. From the Scott's stockholders' standpoint, how did THEY do?
17. Beta measures an asset's relative systematic risk.
True
False
18. Give me at least two of the four pitfalls to avoid in discounted cash flow analysis.
Explanation / Answer
1. Debt, Debt interest works as a tax shield ,because interest on debt is a tax deductible, Due to interest paid in financing from debt, brings tax deduction
2. Debt, when bondholder converts the bonds into share,there is reduction in a EPS
3. low , interest expense is a nature of fixed cost , which is a burden on company to pay perodically
4. Debt , interest cost from debt is a fixed cost ,due to which it may casue default in repayment of liability , if company does not have adeqaute funds or cash balance .
5. variable, dividend is not fixed, Return is totally depend on earning avialable to equityshareholder
8. government for past due taxes, senior creditors, subordinated creditors, preferred stockholders, common stockholders ,liability against Govt 's past tax due has to be paid firstly ,before any amount distributed to creditors while paying off laibility and after that creditors has a has priority over preferrence and equity holder to receive first
17. true, Beta measure the risk related to expected return from assets contributed in portfolio, It is a market risk
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