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An investor thinks companies with strong operating cash flows, low capital and working capital requirements are better investments

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An investor thinks companies with strong operating cash flows, low capital and working capital requirements are better investments. What is their rationale?

Select one:

a. A company that produces strong operating cash flows with relatively little requirements for capital and working capital spending produces proportionally more free cash flows.

b. The investor believes a firm can operate efficiently with minimal capital spending

c. Strong operating cash flow is more important than capital spending and working capital

d. The investor believes that working capital is a waste of money.

e. The investor must have learned about the shareholder value revolution and decided cash is king.

15.

You are a bond trader and you expect interest rates to fall. You want to sell bonds that you expect to perform relatively poorly so that you can allocate the funds to the bonds you expect to perform relatively well. Your portfolio currently consists of the following bonds:

• Euro Bonds: 20 years to maturity, 1.5%% yield.
• Aussie Bonds: 3 years to maturity, 5% yield.
• British Bonds: 30 years to maturity, 2% yield.
• Yankee Bonds: 5 years to maturity, 7% yield.

Which bonds should be removed from the portfolio and which should have the investment allocation increased?

Select one:

a. You should remove the Aussie and Yankee bonds and invest more in the Euro and British bonds

b. Immediately sell the bonds because interest rates are going to fall

c. They will all perform equally, do nothing.

d. You should remove the Euro and British bonds and invest more in the Aussie and Yankee bonds

e. Don’t sell, you should buy more of everything

14.

According to Miller and Modigliani’s proposition, which assumptions are necessary for capital structure decisions to be irrelevant to the value of the firm?

Select one:

a. The assumption that investors never sell or buy shares or bonds

b. Dividends, projects, and new capital do not matter in reality

c. The assumption that a company always maximises the value of the firm

d. Taxes, information costs, transaction costs and investment policy are irrelevant

e. That debt and equity have the same costs; therefore, it does not matter which is used to fund the firm