Finance Chapter 18 and 19 MCQs Set

Ch. 18 and 19 ALL

Question 1 of 20

A firm's earnings per share increased from $10 to $12, dividends increased from $4.00 to $4.80, and the share price increased from $80 to $90. Given this information, it follows that ________.

A. the stock experienced a drop in the P/E ratio

B. the firm had a decrease in dividend payout ratio

C. the firm increased the number of shares outstanding

D. the required rate of return decreased

E. none of the above

Question 2 of 20

Old Style Corporation produces goods that are very mature in their product life cycles. Old Style Corporation is expected to have per share FCFE in year 1 of $1.00, per share FCFE of $0.90 in year 2, and per share FCFE of $0.85 in year 3. After year 3, per share FCFE is expected to decline at a rate of 2% per year. An appropriate required rate of return for the stock is 8%. The stock should be worth ______.

A. $127.63

B. $10.57

C. $20.00

D. $22.22

E. $8.98

Question 3 of 20

Each of two stocks, C and D, are expected to pay a dividend of $3 in the upcoming year. The expected growth rate of dividends is 9% for both stocks. You require a rate of return of 10% on stock C and a return of 13% on stock D. The intrinsic value of stock C _____.

A. will be greater than the intrinsic value of stock D

B. will be the same as the intrinsic value of stock D

C. will be less than the intrinsic value of stock D

D. cannot be calculated without knowing the market rate of return

E. none of the above is true.

Question 4 of 20

The most appropriate discount rate to use when applying a FCFF valuation model is the ___________.

A. required rate of return on equity

B. WACC

C. risk-free rate

D. A or C depending on the debt level of the firm

E. none of the above

Question 5 of 20

The most appropriate discount rate to use when applying a FCFE valuation model is the ___________.

A. required rate of return on equity

B. WACC

C. risk-free rate

D. A or C depending on the debt level of the firm

E. none of the above

Question 6 of 20

Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The total value of the equity of Utica Manufacturing Company should be

A. $1,000,000

B. $2,000,000

C. $3,000,000

D. $4,000,000

E. none of the above

Question 7 of 20

Mature Products Corporation produces goods that are very mature in their product life cycles. Mature Products Corporation is expected to pay a dividend in year 1 of $2.00, a dividend of $1.50 in year 2, and a dividend of $1.00 in year 3. After year 3, dividends are expected to decline at a rate of 1% per year. An appropriate required rate of return for the stock is 10%. The stock should be worth ______.

A. $9.00

B. $10.57

C. $20.00

D. $22.22

E. none of the above

Question 8 of 20

Old Quartz Gold Mining Company is expected to pay a dividend of $8 in the coming year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of Old Quartz Gold Mining Company has a beta of -0.25. The intrinsic value of the stock is ______.

A. $80.00

B. $133.33

C. $200.00

D. $400.00

E. none of the above

Question 9 of 20

Paper Express Company has a balance sheet which lists $85 million in assets, $40 million in liabilities and $45 million in common shareholders' equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90.

What is Paper Express's book value per share?

A. $1.68

B. $2.60

C. $32.14

D. $60.71

E. none of the above

Question 10 of 20

Assume that Bolton Company will pay a $2.00 dividend per share next year, an increase from the current dividend of $1.50 per share that was just paid. After that, the dividend is expected to increase at a constant rate of 5%. If you require a 12% return on the stock, the value of the stock is ________.

A. $28.57

B. $28.79

C. $30.00

D. $31.78

E. none of the above

Question 11 of 20

Return on total assets is the product of _______.

A. interest rates and pre-tax profits

B. the debt-equity ratio and P/E ratio

C. the after-tax profit margin and the asset turnover ratio

D. sales and fixed assets

E. none of the above

Question 12 of 20

A firm has a lower asset turnover ratio than the industry average, which implies The financial statements of Snapit Company are given below.

A. the firm has a lower P/E ratio than other firms in the industry.

B. the firm is less likely to avoid insolvency in the short run than other firms in the industry.

C. the firm is less profitable than other firms in the industry.

D. the firm is utilizing assets less efficiently than other firms in the industry.

E. the firm has lower spending on new fixed assets than other firms in the industry.

Question 13 of 20

The financial statements of the Snapit Company are given below

Snapit Company

Income Statement (2009)

Sales $4,000,000

Cost of Goods Sold 3,040,000

Gross Profit 960,000

Selling and Admin expenses 430,000

Operating Profit 530,000

Interest expense 160,000

Income before tax 370,000

Tax expense 148,000

Net Income $222,000

Balance Sheet

2009 2008

Cash $60,000 $50,000

Accounts Receivable 550,000 500,000

Inventory 690,000 620,000

Total Current Assets 1,300,000 1,170,000

Fixed Assets 1,300,000 1,230,000

Total Assets 2,600,000 2,400,000

Accounts Payable 270,000 250,000

Bank Loan 580,000 500,000

Total current liabilities 850,000 750,000

Bonds Payable 900,000 1,000,000

Total Liabilities 1,750,000 1,750,000

Common stock (25,000 shares) 250,000 250,000

Retained Earnings 600,000 400,000

Total Liabilities and Equity $2,600,000 $2,400,000

Note: Common shares are trading at $100 each

Refer to the financial statements of Snapit Company. The firm's times interest earned ratio for 2009 is __________.

A. 2.26

B. 3.16

C. 3.84

D. 3.31

E. none of the above

Question 14 of 20

Which of the following are issues when dealing with the financial statements of international firms? I) Many countries allow firms to set aside larger contingency reserves than the amounts allowed for U.S. firms. II) Many firms outside the U.S. use accelerated depreciation methods for reporting purposes, whereas most U.S. firms use straight-line depreciation for reporting purposes. III) Intangibles such as goodwill may be amortized over different periods or may be expensed rather than capitalized. IV) There is no way to reconcile the financial statements of non-U. S. firms to GAAP. The financial statements of Black Barn Company are given below

A. I and II

B. II and IV

C. I, II, and III

D. I, III, and IV

E. I, II, III, and IV

Question 15 of 20

The financial statements of the Black Barn Company are given below

Black Barn Company

Income Statement (2009)

Sales $8,000,000

Cost of Goods Sold 5,260,000

Gross Profit 2,740,000

Selling and Admin expenses 1,500,000

Operating Profit 1,240,000

Interest expense 140,000

Income before tax 1,100,000

Tax expense 440,000

Net Income $660,000

Balance Sheet

2009 2008

Cash $200,000 $50,000

Accounts Receivable 1,200,000 950,000

Inventory 1,840,000 1,500,000

Total Current Assets 3,240,000 2,500,000

Fixed Assets 3,200,000 3,000,000

Total Assets $6,440,000 $5,500,000

Accounts Payable 800,000 720,000

Bank Loan 600,000 100,000

Total current liabilities 1,400,000 820,000

Bonds Payable 900,000 1,000,000

Total Liabilities 2,300,000 1,820,000

Common stock (130,000 shares) 300,000 300,000

Retained Earnings 3,840,000 3,380,000

Total Liabilities and Equity $6,440,000 $5,500,000

Note: Common shares are trading at $40 each

Refer to the financial statements of Black Barn Company. The firm's times interest earned ratio for 2009 is _____.

A. 8.86

B. 7.17

C. 9.66

D. 6.86

E. none of the above

Question 16 of 20

Fundamental analysis uses __________.

A. earnings and dividends prospects

B. relative strength

C. price momentum

D. A and B

E. A and C

Question 17 of 20

One problem with comparing financial ratios prepared by different reporting agencies is

A. some agencies receive financial information later than others.

B. agencies vary in their policies as to what is included in specific calculations.

C. some agencies are careless in their reporting.

D. some firms are more conservative in their accounting practices.

E. none of the above.

Question 18 of 20

Common size financial statements make it easier to compare firms ____________.

A. of different sizes

B. in different industries

C. with different degree of leverage

D. that use different inventory valuation methods (FIFO vs. LIFO)

E. none of the above

Question 19 of 20

A firm's current ratio is above the industry average; however, the firm's quick ratio is below the industry average. These ratios suggest that the firm _________.

A. has relatively more total current assets and even more inventory than other firms in the industry

B. is very efficient at managing inventories

C. has liquidity that is superior to the average firm in the industry

D. is near technical insolvency

E. none of the above

Question 20 of 20

The financial statements of the Black Barn Company are given below

Black Barn Company

Income Statement (2009)

Sales $8,000,000

Cost of Goods Sold 5,260,000

Gross Profit 2,740,000

Selling and Admin expenses 1,500,000

Operating Profit 1,240,000

Interest expense 140,000

Income before tax 1,100,000

Tax expense 440,000

Net Income $660,000

Balance Sheet

2009 2008

Cash $200,000 $50,000

Accounts Receivable 1,200,000 950,000

Inventory 1,840,000 1,500,000

Total Current Assets 3,240,000 2,500,000

Fixed Assets 3,200,000 3,000,000

Total Assets $6,440,000 $5,500,000

Accounts Payable 800,000 720,000

Bank Loan 600,000 100,000

Total current liabilities 1,400,000 820,000

Bonds Payable 900,000 1,000,000

Total Liabilities 2,300,000 1,820,000

Common stock (130,000 shares) 300,000 300,000

Retained Earnings 3,840,000 3,380,000

Total Liabilities and Equity $6,440,000 $5,500,000

Note: Common shares are trading at $40 each

Refer to the financial statements of Black Barn Company. The firm's asset turnover ratio for 2009 is _____.

A. 1.79

B. 1.63

C. 1.34

D. 2.58

E. none of the above