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Q1. Other things equal, management should retain profits only if the company's investments within the firm are at least as attractive as the stockholders' other investment opportunities.    a. True    b. FalseQ2. A corporate bond has a face value of $1,000 and a coupon rate of 5%. The bond matures in 15 years and has a current market price of $925. If the corporation sells more bonds it will incur flotation costs of $25 per bond. If the corporate tax rate is 35%, what is the after-tax cost of debt capital?    a. 3.74%    b. 4.45%    c. 5.29%    d. 6.78%Q3. A company has preferred stock that can be sold for $21 per share. The preferred stock pays an annual dividend of 3.5% based on a par value of $100. Flotation costs associated with the sale of preferred stock equal $1.25 per share. The company's marginal tax rate is 35%. Therefore, the cost of preferred stock is    a. 18.87%.    b. 17.72%.    c. 14.26%.    d. 12.94%.Q4. Crandal Dockworks is undergoing a major expansion. The expansion will be financed by issuing new 15-year, $1,000 par, 9% annual coupon bonds. The market price of the bonds is $1,070 each. Crandal's flotation expense on the new bonds will be $50 per bond. Crandal's marginal tax rate is 35%. What is the pre-tax cost of debt for the newly-issued bonds?    a. 8.76%    b. 8.12%    c. 7.49%    d. 10.25%Q5. A firm's cost of capital is influenced by    a. the current ratio.    b. par value of common stock.    c. capital structure.    d. net income.Q6. For a typical corporation, which of the following capital structures will result in the lowest weighted average cost of capital?    a. 40% debt, 20% preferred stock, 40% common equity    b. 50% debt, 10% preferred stock, 40% common equity    c. 60% debt, 10% preferred stock, 30% common equity    d. 60% debt, 15% preferred stock, 25% common equityQ7. Why should firms that own and operate multiple businesses that have different risk characteristics use business-specific, or divisional costs of capital?    a. Not all divisions have equal risk and the firm might accept projects whose returns are higher than are deemed appropriate.    b. Not all business divisions have equal risk and the firm will likely become less risky in the future.    c. Not all lines of business have equal risk and it is likely that the firm will accept projects whose returns are unacceptably low in relation to the risk involved.    d. Use of the same weighted average cost of capital for all divisions may result in too much money being allocated to the least risky division.Q8. Beauty Inc. plans to maintain its optimal capital structure of 40 percent debt, 10 percent preferred stock, and 50 percent common equity indefinitely. The required return on each component source of capital is as follows: debt--8 percent; preferred stock--12 percent; common equity--16 percent. Assuming a 40 percent marginal tax rate, what after-tax rate of return must the firm earn on its investments if the value of the firm is to remain unchanged?    a. 12.40 percent    b. 12.00 percent    c. 11.12 percent    d. 10.64 percentQ9. Consider a project with the following information:Initial Outlay=$1,500YearAfter-Tax Accounting ProfitsAfter-tax Cash Flow Operations1$799$7502$150$1,0003$200$1,200Compute the profitability index if the company's discount rate is 10%.    a. 15.8    b. 1.61    c. 1.81    d. 0.62Q10. What is the net present value's assumption about how cash flows are reinvested?    a. They are reinvested at the IRR.    b. They are reinvested at the APR.    c. They are reinvested at the firm's discount rate.    d. They are reinvested only at the end of the project.Q11. Compute the discounted payback period for a project with the following cash flows received uniformly within each year and with a required return of 8%:Initial Outlay=$100Cash Flows:Year 1 = $40Year 2 = $50Year 3 = $60    a. 2.10 years    b. 2.21 years    c. 2.33 years    d. 3.00 yearsQ12. Which of the following statements is MOST correct?    a. If a project's internal rate of return (IRR) exceeds the required return, then the project's net present value (NPV) must be negative.    b. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.    c. The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the IRR.    d. A project with a NPV = 0 is not acceptable.Q13. Arguments against using the net present value and internal rate of return methods include that    a. they fail to use accounting profits.    b. they require detailed long-term forecasts of the incremental benefits and costs.    c. they fail to consider how the investment project is to be financed.    d. they fail to use the cash flow of the project.Q14. Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc.'s required rate of return for these projects is 10%. Which project would you recommend using the replacement chain method to evaluate the projects with different lives?    a. Project B because its NPV is higher than Project A's replacement chain NPV of $47,623    b. Project A because its replacement chain NPV is $76,652, which exceeds the NPV for Project B    c. Project A because its replacement chain NPV is $45,642, which is less than the NPV for Project B    d. Both projects will be valued the same since they are now both four year projects.Q15. DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 8%. What is the modified internal rate of return of this project?    a. 10.87%    b. 11.57%    c. 13.68%    d. 15.13%Q16. A significant advantage of the internal rate of return is that it    a. provides a means to choose between mutually exclusive projects.    b. provides the most realistic reinvestment assumption.    c. avoids the size disparity problem.    d. considers all of a project's cash flows and their timing.Q17. Since stockholders are able to reduce their exposure to risk by efficiently diversifying their holdings of securities, there is no reason for individual firms to seek diversification of their holdings of assets.    a. True    b. FalseQ18. Blackjack Inc. wants to replace a 9-year-old machine with a new machine that is more efficient. The old machine cost $70,000 when new and has a current book value of $15,000. Blackjack can sell the machine to a foreign buyer for $14,000. Blackjack's tax rate is 35%. The effect of the sale of the old machine on the initial outlay for the new machine is    a. $14,350    b. $13,650    c. $9,100    d. $1,000Q19. Your company is considering the replacement of an old delivery van with a new one that is more efficient. The old van cost $40,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight-line method over a useful life of 8 years. The old van could be sold today for $7,000. The new van has an invoice price of $80,000, and it will cost $6,000 to modify the van to carry the company's products. Cost savings from use of the new van are expected to be $28,000 per year for 5 years, at which time the van will be sold for its estimated salvage value of $18,000. The new van will be depreciated using the simplified straight-line method over its 5-year useful life. The company's tax rate is 35%. Working capital is expected to increase by $5,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the tax effect of selling the old machine?    a. a savings of $2,800    b. a savings of $2,450    c. additional taxes paid of $2,450    d. a tax savings of $1,400Q20. One method of accounting for systematic risk for a project involves identifying a publicly traded firm that is engaged in the same business as that project and using its required rate of return to evaluate the project. This method is referred to as    a. the accounting beta method.    b. scenario analysis.    c. the pure play method.    d. sensitivity analysis.Q21. Which of the following should be excluded in an analysis of a new project's cash flows?    a. additional investment in fixed assets    b. additional investment in accounts receivable    c. additional investment in inventory    d. additional interest expenses on debt financingQ22. The less-risky investment is always the more desirable choice.    a. True    b. FalseQ23. Accounting profits, adjusted for taxes and differences in accounting methods, provide the best measure of relevant cash flows for capital budgeting purposes.    a. True    b. FalseQ24. J.B. Enterprises purchased a new molding machine for $85,000. The company paid $8,000 for shipping and another $7,000 to get the machine integrated with the company's existing assets. J.B. must maintain a supply of special lubricating oil just in case the machine breaks down. The company purchased a supply of oil for $4,000. The machine is to be depreciated on a straight-line basis over its expected useful life of 8 years. Which of the following statements concerning the change in working capital is most accurate?    a. The $4,000 paid for oil is added to the initial outlay, offset by the tax savings $1600.    b. The $4,000 may be expensed each year over the life of the project as part of the incremental free cash flows.    c. The $4,000 is added to the initial outlay and recaptured during the terminal year, hence having no impact on the projects NPV or IRR.    d. Even if the $4,000 is fully recovered at the end of the project, the project's NPV and IRR will be lower if the change in working capital is included in the analysis.Q25. Business risk refers to the relative dispersion (variability) of a company's net income.    a. True    b. FalseQ26. Corporations utilize external financing either because they do not have sufficient earnings to reinvest or they want to rebalance their capital structures.    a. True    b. FalseQ27. Assuming no corporate taxes, the independence hypothesis suggests that a firm's weighted average cost of capital will    a. remain constant regardless of capital structure because the cost of debt and the cost of equity are the same.    b. remain constant because the cost of equity will be increasing as the amount of debt increases due to the increased risk.    c. increase proportionally with the increase in the amount of debt a firm uses.    d. decrease proportionally with the increase in the amount of debt a firm uses.Q28. The break-even model enables the manager of the firm to    a. calculate the minimum price of common stock for certain situations.    b. set appropriate equilibrium thresholds.    c. determine the quantity of output that must be sold to cover all operating costs.    d. determine the optimal amount of debt financing to use.Q29. The EBIT-EPS indifference point    a. identifies the EBIT level at which the EPS will be the same regardless of the financing plan.    b. identifies the point at which the analysis can use EBIT and EPS interchangeably.    c. identifies the level of earnings at which the management is indifferent about the payments of dividends.    d. identifies the sales level at which EBIT equals EPS.Q30. Optimal capital structure is    a. the mix of permanent sources of funds used by the firm in a manner that will maximize the company's common stock price.    b. the mix of all items that appear on the right-hand side of the company's balance sheet.    c. the mix of funds that will minimize the firm's cost of equity capital.    d. the mix of funds that will maximize the firm's interest tax shield.Q31. Because financial markets can be extremely volatile, with bond and stock prices changing significantly from day to day, a firm's management has much greater control over the firm's operating leverage than over its financial leverage.    a. True    b. FalseQ32. Depreciation is considered a fixed cost.    a. True    b. FalseQ33. In order to maximize shareholder value, a corporation must earn a higher rate of return on a dollar that is retained in the corporation than the shareholders can earn by investing the dollar elsewhere.    a. True    b. FalseQ34. AFB, Inc.'s dividend policy is to maintain a constant payout ratio. This year AFB, Inc. paid out a total of $2 million in dividends. Next year, AFB, Inc.'s sales and earnings per share are expected to increase. Dividend payments are expected to    a. remain at $2 million.    b. increase above $2 million.    c. decrease below $2 million.    d. increase above $2 million only if the company issues additional shares of common stock.Q35. According to the clientele effect    a. companies should have dividend payout ratios of either 100% or 0%.    b. companies should avoid making capricious changes in their dividend policies.    c. companies should change their dividend policies to please their target group of investors.    d. even if capital markets are perfect, dividend policy still matters.Q36. Which of the following factors would most likely be present if a company increases its dividend payout ratio significantly?    a. a high debt/equity ratio (i.e), use of a large amount of financial leverage.    b. a quick ratio that is significantly below the industry average    c. current shareholders cannot participate in a new offering and desire to maintain ownership control    d. the variability of expected future earnings decreasesQ37. The difference between the capital gains tax rate and the income tax rate is an incentive for    a. firms never to split their stock.    b. firms to declare more stock dividends.    c. firms to pay more earnings as dividends.    d. firms to retain more earnings.Q38. You are a retired worker whose income is derived from your company pension plan and social security. However, you are highly dependent upon the income generated from your 401(k) plan, which is heavily weighted in stocks that pay substantial dividends. Which of the following dividend policies would you prefer?    a. constant dividend payment ratio    b. stable dollar dividend per share    c. small, regular dividend plus a year-end extra    d. any of the above would be equally desirableQ39. A corporation announces a significant increase in its annual dividend and its stock price increases on the news. This could be explained most directly by    a. residual dividend theory.    b. bird-in-the-hand theory.    c. perfect capital markets.    d. MM"s indifference theorem.Q40. Assume that a firm has a steady record of paying stable dividends for years. Market analysts had expected management to increase the dividend by 7.5% in the latest quarter. However, management announced a 15% increase in the current year's dividend. The market value of the stock rose 20% on the day of the announcement. Which of the following would best explain the stock market's reaction to the announcement?    a. expectations theory    b. dividend irrelevance theory    c. residual dividend theory    d. agency theory
Finance Test

Finance Test

Question # 00300169 Posted By: Christopher.roq Updated on: 05/31/2016 08:08 PM Due on: 06/01/2016
Subject Finance Topic Finance Tutorials:
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Complete these questions by 6/1/2016. Out of 40 questions, I completed 17. Please complete the other 23 with the correct answers.
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  1. Cecil de Crenne
    Tutorial # 00296553 Posted By: Cecil de Crenne Posted on: 06/02/2016 05:02 AM
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