13.6 Learning Objective 13-6
1) Economic value added (EVA) can be computed as net income before taxes minus interest expense minus capital charge.
2) The cost of capital is a weighted average of the returns demanded by the company's stockholders and lenders.
3) Usually new companies have a lower cost of capital.
4) If a corporation's economic value added is negative, stockholders will probably be displeased with the company's management.
5) A positive economic value added (EVA) suggests an increase in stockholders' wealth.
6) An efficient capital market is one in which market prices are above stated cost.
7) In an efficient market, an investor's search for "underpriced" stock will be unsuccessful unless the investor has knowledge of confidential information.
8) The cost of capital is defined as the:
A) sum of liabilities and stockholders' equity accounts.
B) weighted average of the returns demanded by the company's stockholders and lenders.
C) rate of return demanded by stockholders times the rate of return demanded by lenders.
D) rate of return demanded by the stockholders divided by the rate of return demanded by lenders.
9) Economic value added (EVA) is computed as:
A) net income before taxes + long-term debt + interest expense.
B) net income before taxes + interest expense - capital charge.
C) net income before taxes - interest expense + capital charge.
D) net income before taxes - long-term debt + interest expense.
10) If economic value added (EVA) is negative:
A) stockholders' wealth has decreased.
B) stockholders' wealth has increased.
C) stockholders' wealth has stayed the same.
D) stockholders' earnings per share have increased.
11) The cost of capital for a start-up company:
A) is lower for a start-up company since it is untested.
B) depends only on the market rate of interest.
C) depends only on the state of the economy.
D) is higher for a start-up company because it is more risky than an established company.
12) Net Cash Provided by Operating Activities that are consistently lower than net income may imply that:
A) a dividend has not been issued in a long time.
B) the common stock should be split.
C) the company may be facing a cash shortage.
D) working capital has decreased.
13) The capital charge in EVA is computed as:
A) Cost of capital - Notes payable - Current maturities of long-term debt - Long-term debt - Stockholders' equity.
B) (Notes payable, beginning balance + Current maturities of long-term debt, beginning balance + Long-term debt, beginning balance + Stockholders' equity, beginning balance) × Cost of capital.
C) Cost of capital + Current maturities of long-term debt + Loans payable + Long-term debt + Stockholders' equity.
D) (Notes payable + Current maturities of long-term debt + Long-term debt + Stockholders' equity) ÷ Cost of capital.
14) Red flags in financial statement analysis can include all of the following EXCEPT:
A) a debt ratio higher than average.
B) a slowdown in inventory turnover.
C) days' sales in receivables increasing.
D) Net Cash Provided by Operating Activities exceeds net income.