İŞLETME FİNANSI II - Deneme Sınavı - 2

Financial leases are basically a medium-term financing alternative referring to its basic characteristics indicated below:

• Financial leases do not provide for maintenance or service by the lessor.

• Financial leases are fully amortized.

• The lessee usually has a right to renew the lease on expiration.

• Generally, financial leases cannot be canceled. The lessee has the sole responsibility to make all payments.

The correct answer is B.

Advantages of Common Stock Common stock is the most common security to provide finance for the corporate. This way of financing has the following advantages:

Permanent sources of finance: Common stock is a long-term permanent nature of sources of finance; hence, it can be used for long-term or fixed capital requirement of the business.

No fixed dividend payment obligation: The issuance of common stock does not create any obligation to pay a fixed rate of dividend. If the company earns a profit, owners are eligible for profit, they are eligible to get dividend otherwise, and they cannot claim any dividend from the company.

Lower cost of capital: Cost of capital is the major factor, which affects the value of the company. A company with a strong capital base can secure funding less costly as the capital base is considered as a buffer for risks buy the debtors.

Retained earnings: When the company have more share capital, it will be suitable for retained earning which is the fewer cost sources of finance while compared to other sources of finance. 

The correct answer is C.

Firms raise equity funds from their shareholders, who own a direct share of the net income and the net worth of the company. As shareholders hold residual claims on both the earnings and the assets of the business, they bear more risk than the creditors. Therefore, equity financing becomes more expensive than debt financing. Furthermore, as more debt is raised, the risk borne by the shareholder’s increases, leading to a higher cost of equity. The correct answer is A.

The business risk is related to the uncertainty in the business operations of the firm. Business risk is influenced by numerous factors, including sales volume, per-unit price, input costs, competition, the overall economic conditions and etc. If not diversified, the stockholders bear both the business risk and the financial risk of the company. The correct answer is E.

Residual claims on assets: If the company is wound up, the ordinary or equity shareholders have the right to get the claims on assets. These rights are only available to the equity shareholders. The correct answer is D.

The return on invested capital (ROIC) measures the operating profitability on capital investments:

ROIC=NOPAT/Capital=EBIT*(1-T)/Capital

NOPAT is the net operating profit after taxes and the capital is the amount of capital investment required for the persistence of the operations. The correct answer is B.

Maximizing the value of the firm is the main objective and the key to wealth maximization lies in the capital structure decisions. In an attempt to find the best practice in attaining this goal, academicians brought up a number of theoretical models:

The correct answer is D.

The net income approach advocates that a firm can boost its value by lowering its WACC, which is possible by increasing financial leverage in its capital structure. In this approach, it is assumed that the cost of debt is always less than the cost of equity and that the increase in the debt ratio does not lead to a change in the risk perception of the investors. The correct answer is C.

Estimating the optimal capital structure requires a careful analysis with repetitions. The managers normally start with a trial capital structure and (4) evaluate shareholders’ wealth. They continue the same practice until they (2) identify a capital structure maximizing the firm value. At each trial, (1) the cost of debt and equity are projected in order to quantify the WACC. Then, (5) the forecasted free cash flows are capitalized at the calculated WACC to determine the firm value. As a final step, (3) debt is deducted from the value of the firm to measure the value of the equity and the stock price. In practice, we can utilize the earnings per share (EPS) analysis to determine the shareholders’ wealth:

The correct answer is E.

There are other factors that affect the capital structure. The political stability (economic environment-specific factors), the demand volatility (industry-specific factors), the legal status of the firm and the firm's level of leverage (firm-specific factors) are among these factors. The correct answer is A.

The outlay of funds by the firm that is expected to produce benefits over a period of time longer than one year is called capital expenditure. Capital budgeting is the process of evaluating and selecting long-term investments which are consistent with the firm’s main objective of maximizing shareholders’ wealth. Investment consists all kinds of spendings made for acquiring, sustaining, and increasing production factors. Economic profit refers to the risk-adjusted present value of revenue minus all costs, including the opportunity cost of capital. Net income is equal to net earnings (profit) calculated as sales less cost of goods, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes and other expenses. The correct answer is A.

In many textbooks, capital budgeting activity is explained as a process, consisting of a number of stages. Megginson et al. (2010) briefly explain this process in three basic steps, all of which are critical in the process:

The correct answer is C.

Relative state of the investments regarding dependence on each other may be one of the following:

The correct answer is B.

Payback period (II) tells the length of time it takes to get initial cash outflow back, that is the period from the initial cash outflow to the time when the investment project’s cash inflows add up to the initial cash outflow. This technique is (III) a simple, easy to use and easy to understand technique. The assumption is that (IV) cash flow occurs at a constant rate throughout the year. The fact that projected cash flows are discounted at an appropriate discount rate and their present values are used to calculate payback period is in effect in discounted payback period technique. The correct answer is E.

NPV (Net Present Value) technique finds the sum of present value of all cash inflows and cash outflows of a project over its life. The correct answer is C.

Decision rule for internal rate of return technique is as follows: If a project is independent, approve the project(s) that provides IRR that is greater than the expected rate of return (discount rate used in NPV technique). If a project is mutually exclusive, choose the project that provides the highest IRR (that is greater than the expected rate of return (discount rate used in NPV technique)). The correct answer is A.

There are three kinds of risk sources when we talk about the risk of an investment project. The first one is (IV) stand-alone risks that a project exhibits when evaluated alone rather than as part of a combination or portfolio of assets. The second one is (III) within-firm risks that a project has on the total overall riskiness of the company. The third one is (II) market risks that a project has and assessed from the standpoint of a stockholder who has a portfolio of assets. The correct answer is E.

To measure a project’s risks coming from various sources rather than in general manner, further analysis is needed. Sensitivity, scenario and simulation and decision tree analyses are used for this purpose. Real options approach, however, refers to the options of managers about capital investment projects which can be priced by using stock option-pricing. The correct answer is B.

Real options are priced in a similar way like stock options which is called real option valuation (ROV). Peterson and Fabozzi (2002: 153) list five factors that are important in the valuation of a stock option. Then, they list the real option correspondent of each factor as follows.

The correct answer is D.

For funding investments and/or other cash uses by medium and long-term sources, the companies have four different alternatives. These are generally in the forms of bank borrowing, borrowing from special institutions, debt issuance and equity finance, securitization. Therefore, the correct option is D.