Exam Chap 13

O.V. HW1

Question 10.5 out of 0.5 points

"Double taxation" refers to:AnswerSelected Answer: paying taxes on profits at the corporate level and dividends

at the personal level.Response Feedback:

correct


A chief financial officer would typically:AnswerSelected Answer: supervise both the treasurer and

controller.Response Feedback:

correct


Agency problems can best be characterized as:AnswerSelected Answer: differing incentives between managers

and owners.Response Feedback:

correct


An example of a firm's financing decision would be:AnswerSelected Answer: the issuance of ten-year versus twenty-

year bonds.

Response Feedback:

correct


Corporate managers are expected to make corporate decisions that are in the best interest of:AnswerSelected Answer: the corporation's

shareholders.Response Feedback:

correct


Financial markets are used for trading:AnswerSelected Answer: securities, such as shares

of IBM.Response Feedback:

correct


Firms can alter their capital structure by:AnswerSelected Answer: issuing stock to

repay debt.Response Feedback:

correct


In a large corporation, budget preparation would most likely be conducted by the:AnswerSelected Answer: controll

er.

Response Feedback:

correct


Investment banks like Goldman Sachs:AnswerSelected Answer: help companies sell their securities to

investors.Response Feedback:

correct


Long-term financing arrangements occur in the:AnswerSelected Answer: capital

markets.Response Feedback:

correct


The overall goal of capital budgeting projects should be to:AnswerSelected Answer: increase the wealth of the firm's


correct


The primary goal of corporate management should be to:AnswerSelected Answer: maximize the shareholders'

wealth.Response Feedback:

corre

ct Question 13

0.5 out of 0.5 points

When a corporation fails, the maximum that can lost by an investor protected by limited liability is:AnswerSelected Answer: the amount of the initial

investment.Response Feedback:

correct


When managers' compensation plans are tied in a meaningful manner to the profits of the firm, agency problems:AnswerSelected Answer: can be

reduced.Response Feedback:

correct


When the management of a business is conducted by individuals other than the owners, the business is more likely to be a:AnswerSelected Answer: corporati

on.Response Feedback:

correct


Which of the firm's financial managers is most likely to be involved with obtaining financing for the firm?AnswerSelected Answer: Treasur

erResponse Feedback:

correct


Which of the following is NOT a financing decision?AnswerSelected Answer: Should the firm shut down an

unprofitable factory?Response Feedback:

correct


Which of the following would be considered a capital budgeting decision?AnswerSelected Answer: A decision to expand into a new line of products, at a

cost of $5 millionResponse Feedback:

correct


Which of the following would be considered an advantage of the sole proprietorship form of organization?AnswerSelected Answer: Profits taxed at only

one levelResponse Feedback:

correct


Which of the following would correctly differentiate general partners from limited partners in a limited partnership?AnswerSelected Answer:

General partners have unlimited personal liability.

Response Feedback:

correct

HW4 Question 1


A corporation declares $25 million in net income, $1 million in preferred stock dividends and $7 million in common stock dividends. By how much will shareholders' equity increase on the balance sheet?AnswerSelected Answer: $17

millionResponse Feedback:

correct


A firm has $600,000 in current assets and $150,000 in current liabilities. Which of the following is correct if they use cash to pay off $50,000 in accounts payable?AnswerSelected Answer: Net working capital will not

change.Response Feedback:

correct


A firm reports a net profit margin of 10.0% on sales of $3 million when ignoring the effects of financing. If taxes are $200,000, how much is EBIT?AnswerSelected Answer: $500,0

00Response Feedback:

Question 4


A times interest earned ratio of 5.0 indicates that the firm:AnswerSelected Answer: earns significantly more than its interest

obligations.Response Feedback:

correct


How would you interpret an inventory turnover ratio of 10.7?AnswerSelected Answer: The firm has sufficient inventories to maintain sales

for 34.2 days.Response Feedback:

correct


If a firm's cash coverage ratio is greater than its times interest earned ratio, then:AnswerSelected Answer: the firm's assets are not fully

depreciated.Response Feedback:

correct


If a firm's total debt ratio is greater than .5, then:AnswerSelected Answer: its debt-equity ratio

exceeds 1.0.Response Feedback:

correct


Last year's return on equity was 30%, and while the same amount of earnings was generated this year, the ROE has decreased to 20%. The firm has no preferred stock. What caused the decrease?AnswerSelected Answer: Equity increased by

50%.Response Feedback:


The shareholders' equity as shown on a corporate balance sheet belongs to the:AnswerSelected Answer: common


correct


What are the annual sales for a firm with $400,000 in debt, a total debt ratio of .4, and an asset turnover of 3.0?AnswerSelected Answer: $3,000,0



What is the approximate total debt ratio for a firm with a total debt to equity ratio of .65?AnswerSelected Answer: 39

%Response Feedback:

If total debt/equity = .65then total liabilities/total assets

= .65/1.65= 39.39%


What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book value of equity of $3,000,000, and a market/book ratio of 3.0?AnswerSelected Answer: $90.



What is the residual income for a firm with $1 million in total capital, $300,00 in net income, and a 20% cost of capital?AnswerSelected Answer: $100,0


Total capital x cost of capital$1 million x .2 = $200,000Residual income = Net Income - Cost of Capital= 300,000 - 200,000 = $100,000


What must happen to asset turnover to leave ROE unchanged from its original 16% level if the profit margin is reduced from 8% to 6% and the leverage ratio increases from 1.2 to 1.6? Asset turnover must:AnswerSelected Answer: remain

constant.Response Feedback:

ROE = leverage ratio x asset turnover ratio x profit marginOld ROE: .16 = 1.2 x Asset turnover x .08

1.667 = Asset turnover

New ROE: .16 = 1.6 x Asset turnover x .06

1.667 = Asset turnover Question 15


When Tri-C Corp. compares its ratios to industry averages, it has a higher current ratio, an average quick ratio, and a low inventory turnover. What might you assume about Tri-C?AnswerSelected Answer: Its average inventory is

too high.Response Feedback:

correct


Which of the following is not likely to cause a reduction in the NWC turnover ratio?AnswerSelected Answer: Average payables have

increased.Response Feedback:

correct


Which of the following is correct?AnswerSelected Answer: All of

these.Response Feedback:

correct


Which of the following will allow your firm to achieve its targeted 16% ROA with an asset turnover of 2.5?Answer

Selected Answer: A profit margin of

6.4%.Response Feedback:

ROE = Profit margin x Asset turnover.16 = Profit margin x 2.50.064 = Profit margin


Which of the following will increase a firm's times interest earned ratio?AnswerSelected Answer: A decrease in cost of

goods soldResponse Feedback:

correct


Which of the following would be most detrimental to a firm's current ratio if that ratio is currently 2.0?AnswerSelected Answer: Pay off a portion of long-term debt

with cash.Response Feedback:

correct

H/W 5 Question 1


When the amount earned on a deposit has become part of the principal at the end of a specified time period the concept is calledAnswerSelected Answer: compound

interest. Question 2


The future value of $200 received today and deposited at 8 percent for

three years isAnswerSelected Answer: $25

2. Question 3


The present value of $100 to be received 10 years from today, assuming an opportunity cost of 9 percent, isAnswerSelected Answer: $4

2. Question 4


Indicate which of the following is true about annuities.AnswerSelected Answer: An annuity due is an equal payment paid or received at the

beginning of each period. Question 5


The present value of a $25,000 perpetuity at a 14 percent discount rate isAnswerSelected Answer: $178,5

71. Question 6


Bill plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 20 years. If Bill can earn 12 percent on his contributions, how much will he have at the end of the twentieth year?AnswerSelected Answer: $144,1

04 Question 7


In comparing an ordinary annuity and an annuity due, which of the following is true?AnswerSelected Answer: The future value of an annuity due is always greater than the

future value of an otherwise identical ordinary annuity. Question 8


The future value of a $2,000 annuity due deposited at 8 percent compounded annually for each of the next 10 years isAnswerSelected Answer: $31,29

2. Question 9


A college received a contribution to its endowment fund of $2 million. They can never touch the principal, but they can use the earnings. At an assumed interest rate of 9.5 percent, how much can the college earn to help its operations each year?AnswerSelected Answer: $190,0

00 Question 10


If the present value of a perpetual income stream is increasing, the discount rate must beAnswerSelected Answer: decreasi

ng. Question 11


The present value of an ordinary annuity of $350 each year for five years, assuming an opportunity cost of 4 percent, isAnswerSelected Answer: $1,55

8.


A generous philanthropist plans to make a one-time endowment to a renowned heart research center which would provide the facility with $250,000 per year into perpetuity. The rate of interest is expected to be 8 percent for all future time periods. How large must the endowment be?AnswerSelected Answer: $3,125,0

00 Question 13


You have been offered a project paying $300 at the beginning of each year for the next 20 years. What is the maximum amount of money you would invest in this project if you expect 9 percent rate of return to your investment?AnswerSelected Answer: $

2,985.18


You have been offered a project paying $300 at the beginning of each year for the next 20 years. What is the maximum amount of money you would invest in this project if you expect 9 percent rate of return to your investment?AnswerSelected Answer: $

2,985.18


The future value of $200 received today and deposited for three years in an account which pays semiannual interest of 8 percent is ________.AnswerSelected Answer: $253.

00


The future value of an annuity of $1,000 each quarter for 10 years, deposited at 12 percent compounded quarterly isAnswerSelected Answer: $75,40

1. Question 17


Adam borrows $4,500 at 12 percent annually compounded interest to be repaid in four equal annual installments. The actual end-of-year payment isAnswerSelected Answer: $

1,482. Question 18


The rate of return earned on an investment of $50,000 today that guarantees an annuity of $10,489 for six years is approximatelyAnswerSelected Answer: 7%

. Question 19


What annual rate of return would Grandma Zoe need to earn if she deposits $1,000 per month into an account beginning one month from today in order to have a total of $1,000,000 in 30 years?AnswerSelected Answer: 5.98

% Question 20


What effective annual rate of return (EAR) would Rayne need to earn if she deposits $1,000 per month into an account beginning one month from today in order to have a total of $1,000,000 in 30 years?Answer

Selected Answer: 6.14

%Exam 1 Final

Multiple Choice: All of the following are key strength...Question All of the following are key strengths of a corporation EXCEPTlimited liability.low organization costs.access to capital markets.readily transferable ownership.2. Multiple Choice: Profit maximization as the goal of th...Question Profit maximization as the goal of the firm is NOT ideal becauseprofits are only accounting measures.profits today are less desirable than profits earned in future years.profit maximization does not consider risk.cash flows are more representative of financial strength.3. Multiple Choice: The ________ represents a summarysta...Question The ________ represents a summary statement of the firm's financial positionat a given point in time.Answer income statementstatement of retained earningsstatement of cash flowsbalance sheet4. Multiple Choice: Firm ABC had operating profits of $10...Create Question Reuse Question Upload Questions Question SettingsQuestion Firm ABC had operating profits of $100,000, taxes of $17,000, interestexpense of $34,000 and preferred dividends of $5,000. What was the firm'snet profit after taxes?$49,000$83,000$66,000$44,0005. Multiple Choice: Candy Corporation had pretax profits ...Question Candy Corporation had pretax profits of $1.2 million, an average tax rate of 34percent, and it paid preferred stock dividends of $50,000. There were 100,000shares outstanding and no interest expense. What were Candy Corporation'searnings per share?$7.42$4.52$7.59$3.916. Multiple Choice: A corporation had year end 2004 and 2...Question A corporation had year end 2004 and 2005 retained earnings balances of$320,000 and $400,000, respectively. The firm reported net profits after taxesof $100,000 in 2005. The firm paid dividends in 2005 of ________.$80,000$20,000$0$100,0007. Multiple Choice: The ________ measures the percentage ...Question The ________ measures the percentage of each sales dollar remaining after

ALL expenses, including taxes, have been deducted.earnings available to common shareholdersnet profit margingross profit marginoperating profit margin8. Multiple Choice: A firm with sales of $1,000,000, net ...Question A firm with sales of $1,000,000, net profits after taxes of $30,000, total assetsof $1,500,000, and total liabilities of $750,000 has a return on equity of20 percent.15 percent.4 percent.3 percent.9. Multiple Choice: Using the DuPont system of analysis a...Question Using the DuPont system of analysis and holding other factors constant, anincrease in financial leverage will result in ________ in the return on equity.no changea decreasean undetermined changean increase10. Multiple Choice: The present value of a $25,000 perpet...Question The present value of a $25,000 perpetuity at a 14 percent discount rate is$350,000.$219,298.$285,000.$178,571.11. Multiple Choice: Dan plans to fund his individual reti...Question Dan plans to fund his individual retirement account (IRA) with the maximumcontribution of $2,000 at the end of each year for the next 10 years. If Dan canearn 10 percent on his contributions, how much will he have at the end of thetenth year?$51,880$12,290$31,874$20,00012. Multiple Choice: In comparing an ordinary annuity and ...Question In comparing an ordinary annuity and an annuity due, which of the following istrue?

The future value of an annuity due is always greater than the futurevalue of an otherwise identical ordinary annuity.The future value of an annuity due is always less than the future valueof an otherwise identical ordinary annuity, since one less payment isreceived with an annuity due.The future value of an ordinary annuity is always greater than thefuture value of an otherwise identical annuity due.All things being equal, one would prefer to receive an ordinary annuitycompared to an annuity due.13. Multiple Choice: The future value of $200 received tod...Question The future value of $200 received today and deposited at 8 percentcompounded semi-annually for three years is$158.$252.$253.$380.14. Multiple Choice: What annual rate of return would Gran...

Question What annual rate of return would Grandma Zoe need to earn if she deposits$1,000 per month into an account beginning one month from today in order tohave a total of $1,000,000 in 30 years?5.28%4.55%6.23%5.98%15. Multiple Choice: If Nico Corporation has cost of goods...Question If Nico Corporation has cost of goods sold of $300,000 and inventory of$30,000, then the inventory turnover is ________ and the average age ofinventory is ________.10; 36.536.5; 1036.0; 1010; 36.016. Multiple Choice: A firm with a gross profit margin whi...Question A firm with a gross profit margin which meets industry standard and a netprofit margin which is below industry standard must have excessivedividend payments.general and administrative expenses.cost of goods sold.principal payments.17. Multiple Choice: A firm with a substandard net profit ...Question A firm with a substandard net profit margin can improve its return on totalassets bydecreasing its total asset turnover.increasing its total asset turnover.decreasing its fixed asset turnover.increasing its debt ratio.18. Multiple Choice: One way often used to insure that man...Question One way often used to insure that management decisions are in the bestinterest of the stockholders is to

tie management compensation to the performance of the company'scommon stock price.threaten to fire managers who are seen as not performing adequately.remove management's perquisites.tie management compensation to the level of earnings per share.19. Multiple Choice: When the amount earned on a deposith...Question When the amount earned on a deposit has become part of the principal at theend of a specified time period the concept is calledcompound interest.future value.primary interest.discount interest.20. Multiple Choice: The future value of a $2,000 annuity ...Question The future value of a $2,000 annuity due deposited at 8 percent compoundedannually for each of the next 10 years is$31,292.$14,494.$28,974.$13,420.21. Multiple Choice: What is the market price of a share o...

Question What is the market price of a share of stock for a firm with 100,000 sharesoutstanding, a book value of equity of $3,000,000, and a market/book ratioof 3.0?AnswerCorrect FeedbackIncorrect Feedback$8.57$30.00$90.00$105.0022. Multiple Choice: A college received a contribution to ...Question A college received a contribution to its endowment fund of $2 million. Theycan never touch the principal, but they can use the earnings. At an assumedinterest rate of 9.5 percent, how much can the college earn to help itsoperations each year?$18,000$190,000$95,000$19,00023. Multiple Choice: What is the residual income for a fir...Points Update Hide Question DetailsSelect: All None Select by Type: - Question Type -Question What is the residual income for a firm with $1 million in total capital,$300,00 in net income, and a 20% cost of capital?$100,000$140,000$240,000$500,00024. Multiple Choice: Adam borrows $4,500 at 12 percentann...Question Adam borrows $4,500 at 12 percent annually compounded interest to berepaid in four equal annual installments. The actual end-of-year payment is$ 942.$2,641.$1,482.$1,125.25. Multiple Choice: Which of the following will increase ...Question Which of the following will increase a firm's times interest earned ratio?AnswerCorrect Feedback correctIncorrect Feedback incorrectAn increase in debtA decrease in cost of goods soldAn increase in interest expenseA decrease in net income

H/W 6 Question 1


The ________ rate of interest creates equilibrium between the supply of savings and the demand for investment funds.Answer

Selected Answer: re

al Question 2


________ yield curve reflects higher expected future rates of interest.AnswerSelected Answer: An upward-

sloping Question 3


Generally, an increase in risk will result in ________ required return or interest rate.AnswerSelected Answer: a

higher Question 4


Generally, long-term loans have higher interest rates than short-term loans because ofAnswerSelected Answer: all of the

above. Question 5


Nico Nelson, a management trainee at a large New York-based bank is trying to estimate the real rate of return expected by investors. He notes that the 3-month T-bill currently yields 3 percent and has decided to use the consumer price index as a proxy for expected inflation. What is the estimated real rate of interest if the CPI is currently 2 percent?AnswerSelected Answer: 1

% Question 6


Consider the following returns and yields: U.S. T-bill = 8%, 5-year U.S. T-note = 7%, IBM common stock = 15%, IBM AAA Corporate Bond = 12% and 10-year U.S. T-bond = 6%. Based on this information, the shape of the yield curve isAnswerSelected Answer: downward

sloping. Question 7


What is the nominal rate of return on an IBM bond if the real rate of interest is 3 percent, the inflation risk premium is 2 percent, the U.S. T-bill rate is 5 percent, the maturity risk premium on the IBM bond is 3 percent, the default risk premium on the IBM bond is 2 percent, and the liquidity risk premium on the bond is 1 percent?AnswerSelected Answer: 11

% Question 8


Nico bought an investment one year ago and just calculated his return on investment. He found that his purchasing power had increased by 15 percent as a result of his investment. If inflation during the year was 4 percent, then Nico's ________.AnswerSelected Answer: nominal return on investment is more

than 15 percent Question 9


Another name for a deeply discounted bond that pays no coupon interest is aAnswerSelected Answer: zero coupon

bond. Question 10


The ________ feature permits the issuer to repurchase bonds at a stated

price prior to maturity.AnswerSelected Answer: cal

l Question 11


The value of a bond is the present value of theAnswerSelected Answer: interest payments and

maturity value. Question 12


If the required return is less than the coupon rate, a bond will sell atAnswerSelected Answer: a

premium.


A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for ________ today.AnswerSelected Answer: $1,268.

20 Question 14


A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 percent, the firm's bond will sell for ________ today.AnswerSelected Answer: $840.

67


Calculate the value of a $1,000 bond which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12 percent. The required return on similar-risk bonds is 20 percent.AnswerSelected Answer: $656.

77 Question 16


Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon bonds. If each bond is priced to yield 7 percent, how much will Jia Hua receive (ignoring issuance costs) when the bonds are first sold?AnswerSelected Answer: $15,5

05 Question 17


On January 1, 2002, Zheng Corporation will issue new bonds to finance its expansion plans. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate that is due January 1, 2017. This firm's bonds currently are selling for $1,091.96. If interest is paid semiannually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par?AnswerSelected Answer: 7.00

% Question 18


________ is secured by real estate.AnswerSelected Answer: A mortgage

bond Question 19


________ is a stipulation in a long-term debt agreement that subsequent or less important creditors agree to wait until all claims of the ________ are satisfied before having their claims satisfied.AnswerSelected Answer: Subordination;

senior debt Question 20


A ________ is a complex and lengthy legal document stating the conditions under which a bond has been issued.AnswerSelected Answer: bond

indenture

H/W 7 Question 1


If bankruptcy were to occur, stockholders would have prior claim on assets overAnswerSelected Answer: no

one. Question 2


Which of the following terms typically applies to common stock but not to preferred stock?AnswerSelected Answer: Voting

rights. Question 3


Key differences between common stock and bonds include all of the following EXCEPTAnswerSelected

Answer: common stockholders have a senior claim on assets and income relative to bondholders.


Key differences between common stock and bonds include all of the following EXCEPTAnswerSelected Answer: dividends paid to bondholders are tax-deductible but interest

paid to stockholders is not. Question 5


Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common stockholders areAnswerSelected Answer: cumulati

ve. Question 6


An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of ________.AnswerSelected Answer: $8.0

0 Question 7


The cost of preferred stock isAnswerSelected Answer: higher than the cost of long-term debt and lower than the

cost of common stock. Question 8


All of the following are characteristics of preferred stock EXCEPTAnswerSelected Answer:

it gives the holder voting rights which permit selection of the firm's directors.


A firm has issued cumulative preferred stock with a $100 par value and a 12 percent annual dividend. For the past two years, the board of directors has decided not to pay a dividend. The preferred stockholders must be paid ________ prior to paying the common stockholders.AnswerSelected Answer: $36/

share Question 10


Which of the following is false?AnswerSelected Answer: Preemptive rights often result in a dilution of

ownership. Question 11


A proxy statement isAnswerSelected Answer: a statement giving the votes of a stockholder to

another party. Question 12


An ADR isAnswerSelected Answer: a claim issued by a U.S. bank representing ownership of shares

of a foreign company's stock held on deposit by the U.S. bank and is issued in dollars to U.S. investors.


Which of the following is usually a right of a preferred stockholder?Answer

Selected Answer: Right to receive dividend payments before any dividends are

paid to common stockholders. Question 14


A firm has an issue of preferred stock outstanding that has a stated annual dividend of $4. The required return on the preferred stock has been estimated to be 16 percent. The value of the preferred stock is ________.AnswerSelected Answer: $2

5 Question 15


A firm has an issue of preferred stock outstanding that has a par value of $100 and a 4% dividend. If the current market price of the preferred stock is $50, the yield on the preferred stock is ________.AnswerSelected Answer: 8.00

% Question 16


In the Gordon model, the value of the common stock is theAnswerSelected Answer: present value of a constant, growing

dividend stream. Question 17


Emmy Lou, Inc. has an expected dividend next year of $5.60 per share, a growth rate of dividends of 10 percent, and a required return of 20 percent. The value of a share of Emmy Lou, Inc.'s common stock is ________.AnswerSelected Answer: $56.

00 Question 18


If expected return is less than required return on an asset, rational investors willAnswerSelected Answer: sell the asset, which will drive the price down and cause the

expected return to reach the level of the required return. Question 19


Tangshan China Company's stock is currently selling for $80.00 per share. The expected dividend one year from now is $4.00 and the required return is 13 percent. What is Tangshan's dividend growth rate assuming that dividends are expected to grow at a constant rate forever?AnswerSelected Answer: 8

% Question 20


Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. Assuming Tangshan China's most recent dividend was $5.50, what is the required rate of return on Tangshan's stock?AnswerSelected Answer: 8.6

%

h/w 9 Question 1


________ projects do not compete with each other; the acceptance of one ________ the others from consideration.AnswerSelected Answer: Independent; does not

eliminate Question 2


A firm with limited dollars available for capital expenditures is subject toAnswerSelected Answer: capital

rationing. Question 3


A conventional cash flow pattern associated with capital investment projects consists of an initialAnswerSelected Answer: outflow followed by a series of

inflows. Question 4


The ordering of capital expenditure projects on the basis of some predetermined measure such as the rate of return is calledAnswerSelected Answer: the ranking

approach. Question 5


When making replacement decisions, the development of relevant cash flows is complicated when compared to expansion decisions, due to the need to calculate ________ cash inflows.AnswerSelected Answer: incremen

tal Question 6


Cash flows that could be realized from the best alternative use of an owned asset are calledAnswerSelected Answer: opportunity

costs. Question 7


A corporation is considering expanding operations to meet growing demand. With the capital expansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital isAnswerSelected Answer: an increase of

$60,000. Question 8


A corporation is selling an existing asset for $21,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction isAnswerSelected Answer: $7,720 tax

liability. Question 9


Table 8.4

Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent.

______________________________________________________________________

*Not applicable

For Proposal 1, the depreciation expense for year 1 is ________. (See Table 8.4.)AnswerSelected

Answer: $150,000


Table 8.4


______________________________________________________________________

*Not applicable

For Proposal 1, the annual incremental after-tax cash flow from operations for year 1 is ________. (See Table 8.4.)AnswerSelected Answer: $210,0

00 Question 11


Table 8.4


______________________________________________________________________

*Not applicable

For Proposal 2, the book value of the existing asset is ________. (See Table 8.4.)AnswerSelected Answer: $13,6

00 Question 12


Table 8.4


______________________________________________________________________

*Not applicable

For Proposal 2, the tax effect on the sale of the existing asset results in ________. (See Table 8.4.)AnswerSelected Answer: $14,560 tax



Table 8.4


______________________________________________________________________

*Not applicable

For Proposal 2, the initial outlay equals ________. (See Table 8.4.)AnswerSelected Answer: $164,560 cash

outflow. Question 14


Table 8.4


______________________________________________________________________

*Not applicable

For Proposal 2, the incremental depreciation expense for year 2 is ________. (See Table 8.4.)AnswerSelected Answer: $60,0

00 Question 15


Table 8.4

Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on

ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent.

______________________________________________________________________

*Not applicable


00 Question 16


Table 8.4


______________________________________________________________________

*Not applicable

For Proposal 3, the tax effect on the sale of the existing asset results in ________. (See Table 8.4.)AnswerSelected Answer: $16,000 tax



Table 8.4

Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment

proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent.

______________________________________________________________________

*Not applicable

For Proposal 3, the initial outlay equals ________. (See Table 8.4.)AnswerSelected Answer: $211,0

00 Question 18


Table 8.4


______________________________________________________________________

*Not applicable

For Proposal 3, the incremental depreciation expense for year 3 is ________. (See Table 8.4.)AnswerSelected Answer: $47,8

50 Question 19


Table 8.4


______________________________________________________________________

*Not applicable


40 Question 20


A corporation is evaluating the relevant cash flows for a capital budgeting decision and must estimate the terminal cash flow. The proposed machine will be disposed of at the end of its usable life of five years at an estimated sale price of $15,000. The machine has an original purchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percent tax rate on ordinary income and long-term capital gain. The terminal cash flow isAnswerSelected Answer: $16,00

0.

H/W 8 Question 1


Which of the following capital budgeting techniques ignores the time value of money?

AnswerSelected Answer: Paybac

k. Question 2


Should Tangshan Mining company accept a new project if its maximum payback is 3.5 years and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?AnswerSelected Answer: Yes

. Question 3


The minimum return that must be earned on a project in order to leave the firm's value unchanged isAnswerSelected Answer: the cost of

capital. Question 4


A firm would accept a project with a net present value of zero becauseAnswerSelected Answer: the project would maintain the wealth of the

firm's owners. Question 5


What is the NPV for the following project if its cost of capital is 15 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?AnswerSelected Answer: ($137,05

3). Question 6


What is the NPV for the following project if its cost of capital is 0 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?AnswerSelected Answer: $1,700,0

00. Question 7


A firm is evaluating three capital projects. The net present values for the projects are as follows:

The firm shouldAnswerSelected Answer: accept Projects 1 and 2 and reject

Project 3. Question 8


What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?AnswerSelected Answer: 13.57

%. Question 9


There is sometimes a ranking problem among NPV and IRR when selecting among mutually exclusive investments. This ranking problem only occurs whenAnswerSelected Answer: the cost of capital is to the left of the

crossover point. Question 10


Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project B also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 25 percent?AnswerSelected Answer: Neith

er. Question 11


The ________ is the discount rate that equates the present value of the cash inflows with the initial investment.AnswerSelected Answer: internal rate of

return Question 12


A firm with a cost of capital of 13 percent is evaluating three capital projects. The internal rates of return are as follows:

The firm shouldAnswerSelected Answer: accept Projects 2 and 3 and reject

Project 1. Question 13


The underlying cause of conflicts in ranking for projects by internal rate of return and net present value methods isAnswerSelected Answer: the reinvestment rate assumption regarding

intermediate cash flows. Question 14


Which capital budgeting method is most useful for evaluating the following project? The project has an initial after tax cost of $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, ($2,900,000) in year 2, $2,700,000 in year 3 and $2,300,000 in year 4?AnswerSelected Answer: NPV

. Question 15


Table 9.4

A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows:

If the firm in Table 9.4 has a required payback of two (2) years, it shouldAnswerSelected Answer: accept project A and

reject B. Question 16


Table 9.4

A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows:

The new financial analyst does not like the payback approach (Table 9.4) and determines that the firm's required rate of return is 15 percent. His recommendation would be to

AnswerSelected Answer: reject project A and

accept B. Question 17


When the net present value is negative, the internal rate of return is ________ the cost of capital.AnswerSelected Answer: less

than Question 18


Table 9.5

A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent.

Using the internal rate of return approach to ranking projects, which projects should the firm accept? (See Table 9.5)AnswerSelected Answer: 1, 2, 3,

and 5 Question 19


Table 9.5

A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent.

Using the net present value approach to ranking projects, which projects should the firm accept? (See Table 9.5)AnswerSelected Answer: 1, 3, 5,

and 6 Question 20


A firm is evaluating two independent projects utilizing the internal rate of return technique. Project X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000. Project Z has a initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. The firm shouldAnswerSelected Answer: accept only X if the cost of capital is at most

15 percent.

EXAM 2 Question 1

4 out of 4 points

The yield curve in an economic period where higher future inflation is expected would most likely beAnswerSelected Answer: upward-

sloping. Question 2

4 out of 4 points

What is the nominal rate of return on an IBM bond if the real rate of interest is 3 percent, the inflation risk premium is 2 percent, the U.S. T-bill rate is 5 percent, the maturity risk premium on the IBM bond is 3 percent, the default risk premium on the IBM bond is 2 percent, and the liquidity risk premium on the bond is 1 percent?AnswerSelected Answer: 11

% Question 3

4 out of 4 points

A bond will sell ________ when the stated rate of interest exceeds the required rate of return, ________ when the stated rate of interest is less than the required return, and ________ when the stated rate of interest is equal to the required return.AnswerSelected Answer: at a premium; at a discount; equal to

the par value Question 4

4 out of 4 points

Calculate the value of a $1,000 bond which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12 percent. The required return on similar-risk bonds is 20 percent.AnswerSelected Answer: $656.

77 Question 5

4 out of 4 points

Nico Corp issued bonds bearing a coupon rate of 12 percent, pay coupons semiannually, have 3 years remaining to maturity, and are currently priced at $940 per bond. What is the yield to maturity?AnswerSelected Answer: 14.54

% Question 6

4 out of 4 points

Equity capital can be raised throughAnswerSelected Answer: retained earnings and the

stock market. Question 7

4 out of 4 points

A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par value and an 8 percent annual dividend. The firm also has 5,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed the preferred dividend for the prior two years, how much must the preferred stockholders be paid prior to paying

dividends to common stockholders?AnswerSelected Answer: $24,0

00 Question 8

4 out of 4 points

An ADR isAnswerSelected Answer: a claim issued by a U.S. bank representing ownership of shares

of a foreign company's stock held on deposit by the U.S. bank and is issued in dollars to U.S. investors.

Question 94 out of 4 points

A firm has an expected dividend next year of $1.20 per share, a zero growth rate of dividends, and a required return of 10 percent. The value of a share of the firm's common stock is ________.AnswerSelected Answer: $1

2 Question 10

4 out of 4 points

Emmy Lou, Inc. has an expected dividend next year of $5.60 per share, a growth rate of dividends of 10 percent, and a required return of 20 percent. The value of a share of Emmy Lou, Inc.'s common stock is ________.AnswerSelected Answer: $56.

00 Question 11

4 out of 4 points

If expected return is less than required return on an asset, rational investors willAnswerSelected Answer: sell the asset, which will drive the price down and cause the

expected return to reach the level of the required return.


Nico Corporation's common stock is expected to pay a dividend of $3.00 forever and currently sells for $21.42. What is the required rate of return?AnswerSelected Answer: 14

% Question 13

4 out of 4 points

Table 8.2

The cash flow pattern depicted is associated with a capital investment and may be characterized as (See Table 8.2.)AnswerSelected Answer: a mixed stream and conventional

cash flow. Question 14

4 out of 4 points

A firm with unlimited funds must evaluate five projects. Projects 1 and 2 are independent and Projects 3, 4, and 5 are mutually exclusive. The projects are listed with their returns.

A ranking of the projects on the basis of their returns from the best to the worst according to their acceptability to the firm would beAnswerSelected Answer: 4, 1, and

2. Question 15

4 out of 4 points

A corporation is considering expanding operations to meet growing demand. With the capital expansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts

receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital isAnswerSelected Answer: an increase of

$60,000. Question 16

4 out of 4 points

Table 8.5

Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.

The tax effect on the sale of the existing asset results in ________. (See Table 8.5)AnswerSelected Answer: $1,100 tax


4 out of 4 points

Table 8.5


The initial outlay equals ________. (See Table 8.5)AnswerSelected Answer: $44,1

00 Question 18

4 out of 4 points

Table 8.5


The incremental depreciation expense for year 1 is ________. (See Table 8.5)AnswerSelected Answer: $7,6

00 Question 19

4 out of 4 points

Table 8.5


The annual incremental after-tax cash flow from operations for year 1 is ________. (See Table 8.5)

AnswerSelected Answer: $16,6

00 Question 20

4 out of 4 points

A corporation is evaluating the relevant cash flows for a capital budgeting decision and must estimate the terminal cash flow. The proposed machine will be disposed of at the end of its usable life of five years at an estimated sale price of $2,000. The machine has an original purchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percent tax rate on ordinary income and long-term capital gain. The terminal cash flow isAnswerSelected Answer: $8,20

0. Question 21

4 out of 4 points

Should Tangshan Mining company accept a new project if its maximum payback is 3.25 years and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?AnswerSelected Answer: No

. Question 22

4 out of 4 points

What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?AnswerSelected Answer: 13.57

%. Question 23

4 out of 4 points

What is the NPV for the following project if its cost of capital is 0 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?AnswerSelected Answer: $1,700,0

00. Question 24

4 out of 4 points

Consider the following projects, X and Y, where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 10 percent?AnswerSelected Answer: Project

X. Question 25

4 out of 4 points

Unlike the net present value criteria, the internal rate of return approach assumes an interest rate equal toAnswerSelected Answer: the project's internal rate

of return.

H/W 13Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) The cost of capital reflects the cost of funds

A) at current book values. B) over a long-run time period.

C) over a short-run time period. D) at a given point in time.

2) The four basic sources of long-term funds for the business firm are 2)

A) current liabilities, long-term debt, common stock, and retained earnings.

B) long-term debt, common stock, preferred stock, and retained earnings.

C) current liabilities, long-term debt, common stock, and preferred stock.

D) long-term debt, paid-in capital in excess of par, common stock, and retained earnings.

3) 3) The ________ is a weighted average of the cost of funds which reflects the interrelationship of

financing decisions.

A) risk premium B) cost of capital C) nominal cost D) risk-free rate

4) The cost to a corporation of each type of capital is dependent upon 4)

A) the risk-free rate of each type of capital plus the business risk and the financial risk of the

firm.

B) the risk-free rate of each type of capital plus the business risk of the firm.

C) the risk-free rate of bonds plus the business risk of the firm.

D) the risk-free rate of each type of capital plus the financial risk of the firm.

5) 5) The ________ from the sale of a security are the funds actually received from the sale after

________, or the total costs of issuing and selling the security, which have been subtracted from the

total proceeds.

A) gross proceeds; the flotation costs B) net proceeds; the after-tax costs

C) net proceeds; the flotation costs D) gross proceeds; the after-tax costs

6) A tax adjustment must be made in determining the cost of ________. 6)

A) long-term debt B) retained earnings

C) preferred stock D) common stock

7) 7) A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost of

issuing and selling the stock was $2 per share. The firm's marginal tax rate is 40 percent. The cost of

the preferred stock is

A) 10.2 percent. B) 3.9 percent. C) 6.1 percent. D) 9.8 percent.

18) 8) If a corporation has an average tax rate of 40 percent, the approximate, annual, after-tax cost of

debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950 is

A) 10 percent. B) 6.0 percent. C) 10.6 percent. D) 7.6 percent.

9) 9) Nico Trading Corporation is considering issuing long-term debt. The debt would have a 30 year

maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a

discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5

percent of face value. The firm's tax rate is 35 percent. Given this information, the after tax cost of

debt for Nico Trading would be

A) 10.00%. B) 11.17%.

C) 7.26%. D) none of the above.

10) What would be the cost of new common stock equity for Tangshan Mining if the firm just paid a 10)

dividend of $4.25, the stock price is $55.00, dividends are expected to grow at 8.5 percent

indefinitely, and flotation costs are $6.25 per share?

A) 16.88%. B) 17.96%.

C) 9.46%. D) none of the above.

11) 11) A firm has common stock with a market price of $25 per share and an expected dividend of $2 per

share at the end of the coming year. The growth rate in dividends has been 5 percent. The cost of

the firm's common stock equity is

A) 8 percent. B) 5 percent. C) 10 percent. D) 13 percent.

12) 12) Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of

a corporation is

A) long-term debt, preferred stock, retained earnings, new common stock.

B) new common stock, retained earnings, preferred stock, long-term debt.

C) preferred stock, retained earnings, common stock, new common stock.

D) common stock, preferred stock, long-term debt, short-term debt.

13) When discussing weighing schemes for calculating the weighted average cost of capital, the 13)

preferences can be stated as

A) book value weights are preferred over market value weights and historic weights are

preferred over target weights.

B) market value weights are preferred over book value weights and historic weights are

preferred over target weights.

C) book value weights are preferred over market value weights and target weights are preferred

over historic weights.

D) market value weights are preferred over book value weights and target weights are preferred

over historic weights.

214) 14) Tangshan Mining is considering issuing preferred stock. The preferred stock would be sold for par

value of $75, and a 5.50 percent dividend. What is the cost of preferred stock for Tangshan if

flotation costs would amount to 5.5 percent of par value?

A) 5.82%. B) 5.50%. C) 7.73%. D) 5.27%.

15) The cost of new common stock financing is higher than the cost of retained earnings due to 15)

A) flotation costs and overpricing. B) commission costs and overpricing.

C) flotation costs and commission costs. D) flotation costs and underpricing.

16) Firms underprice new issues of common stock for the following reason(s). 16)

A) Many investors view the issuance of additional shares as a signal that management is using

common stock equity financing because it believes that the shares are currently overpriced.

B) When the market is in equilibrium, additional demand for shares can be achieved only at a

lower price.

C) When additional shares are issued, each share's percent of ownership in the firm is diluted,

thereby justifying a lower share value.

D) all of the above.

17) A firm has determined its cost of each source of capital and optimal capital structure, which is

composed of the following sources and target market value proportions:

Target Market After-Tax

Source of Capital Proportions Cost

Long-term debt 45% 5%

Preferred stock 10 14

Common stock equity 45 22

If the firm were to shift toward a more leveraged capital structure (i.e., a greater percentage of debt

in the capital structure), the weighted average cost of capital would

A) decrease. B) increase.

C) remain unchanged. D) not be able to be determined.

18) A firm has determined its cost of each source of capital and optimal capital structure, which is

composed of the following sources and target market value proportions:

Target Market

Source of Capital Proportions After-Tax Cost

Long-term debt 40% 6%

Preferred stock 10 11

Common stock equity 50 15

The weighted average cost of capital is

A) 15 percent. B) 11 percent. C) 6 percent. D) 10.7 percent.

3Table 11.3

Balance Sheet

General Talc Mines

December 31, 2003

Assets

Current Assets

Cash $25,000

Accounts Receivable 120,000

Inventories 300,000

Total Current Assets $445,000

Net Fixed Assets $500,000

Total Assets $945,000

Liabilities and Stockholders' Equity

Current Liabilities

Accounts Payable $80,000

Notes Payable 350,000

Accruals 50,000

Total Current Liabilities $480,000

Long-Term Debts(150 bonds issued at $1,000 par) 150,000

Total Liabilities $630,000

Stockholders' Equity Common Stock (7,200 shares outstanding) $180,000

Retained Earnings 135,000

Total Stockholders' Equity $315,000

Total Liabilities and Stockholders' Equity $945,000

19) 19)

Source of Capital After-Tax Cost

Long-term debt 8%

Common stock equity 19

Given this after-tax cost of each source of capital, the weighted average cost of capital using book

weights for General Talc Mines is ________. (See Table 11.3.)


20) 20) General Talc Mines has compiled the following data regarding the market value and cost of the

specific sources of capital.

Source of Capital After-Tax Cost

Long-term debt 8%

Common stock equity 19

Market price per share of common stock $50

Market value of long-term debt $980 per bond

The weighted average cost of capital using market value weights is (See Table 11.3.)


4

Exam 16

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) 1) The firm's ________ is the level of sales necessary to cover all operating costs, i.e., the point at

which EBIT = $0.

A) financial breakeven point B) total breakeven point

C) cash breakeven point D) operating breakeven point

2) If a firm's fixed operating costs decrease, the firm's operating breakeven point will 2)

A) change in an undetermined direction. B) decrease.

C) increase. D) remain unchanged.

3) If a firm's sale price per unit decreases, the firm's operating breakeven point will 3)


C) increase. D) remain unchanged.

4) If a firm's fixed financial costs decrease, the firm's operating breakeven point will 4)


C) remain unchanged. D) increase.

5) 5) A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its

variable cost per unit is $15. The firm's operating breakeven point in units is ________ and its

breakeven point in dollars is ________.

A) 667; $16,675 B) 250; $ 6,250 C) 1,000; $25,000 D) 400; $10,000

6) 6) ________ leverage is concerned with the relationship between sales revenue and earnings per

share.

A) Operating B) Total C) Variable D) Financial

7) ________ results from the use of fixed-cost assets or funds to magnify returns to the firm's owners. 7)

A) Long-term debt B) Equity

C) Capital structure D) Leverage

8) Fixed financial charges include 8)

A) common stock dividends and preferred stock dividends.

B) stock repurchase expense.

C) common stock dividends and bond interest expense.

D) bond interest expense and preferred stock dividends.

9) A decrease in fixed financial costs will result in ________ in financial risk. 9)

A) an increase B) an undetermined change

C) no change D) a decrease

10) Higher financial leverage causes ________ to increase more for a given increase in ________. 10)

A) EBIT; sales B) EBIT; EPS C) EPS; EBIT D) EPS; sales

11) With the existence of fixed operating costs, a decrease in sales will result in ________ in EBIT. 11)

A) a less than proportional decrease B) a proportional increase

C) an equal increase D) a more than proportional decrease

12) 12) A firm has v$650,000, a sales price per unit of $20, and a variable cost per

unit of $13. At a base sales level of 500,000 units, the firm's degree of operating leverage is

________.

A) 1.11 B) 1.07 C) 1.18 D) 1.23

13) 13) A firm has EBIT of $375,000, interest expense of $75,000, preferred dividends of $6,000 and a tax

rate of 40 percent. The firm's degree of financial leverage at a base EBIT level of $375,000 is

________.

A) 1.27 B) 1.29 C) 1.09 D) 0.97

14) 14) At a base sales level of $400,000, a firm has a degree of operating leverage of 2 and a degree of

financial leverage of 1.5. The firm's degree of total leverage is ________.

A) 0.5 B) 3.0 C) 3.5 D) 1.3

15) Generally, ________ in leverage result in ________ return and ________ risk. 15)

A) increases; increased; increased B) increases; decreased; decreased

C) decreases; increased; decreased D) increases; decreased; increased

16) 16) A firm has interest expense of $145,000, preferred dividends of $25,000, and a tax rate of 40 percent.

The firm's financial breakeven point is

A) $186,667. B) $ 25,000. C) $170,000. D) $145,000.

17) Operating leverage measures the effect of fixed operating costs on the relationship between 17)

A) Sales and EPS. B) EBIT and EPS.

C) Sales and EBIT. D) none of the above.

18) Which of the following is NOT a reason why debt capital is considered to be the least risky source 18)

of capital?

A) It has a high priority claim against assets and earnings.

B) It does not normally have to be repaid at a specific future date.

C) It is a low cost source of capital because interest payments are tax deductible.

D) It has a strong legal position.

19) According to the traditional approach to capital structure, the value of the firm will be maximized

when

A) the dividend payout is maximized.

B) the weighted average cost of capital is minimized.

C) the cost of debt is minimized.

D) the financial leverage is maximized.

20) 20) In order to enhance the wealth of stockholders and to send positive signals to the market,

corporations generally raise funds using the following order:

A) Equity, retained earnings, debt. B) Retained earnings, equity, debt.

C) Debt, retained earnings, equity. D) Retained earnings, debt, equity.

21) In the EBIT-EPS approach to capital structure, risk is represented by 21)

A) the slope of the capital structure line. B) shifts in the cost of equity capital.

C) shifts in the cost of debt capital. D) shifts in the times-interest-earned ratio.

22) 22) A firm has a current capital structure consisting of $400,000 of 12 percent annual interest debt and

50,000 shares of common stock. The firm's tax rate is 40 percent on ordinary income. If the EBIT is

expected to be $200,000, the firm's earnings per share will be ________.

A) $7.04 B) $1.82 C) $2.40 D) $3.04

23) 23) A firm is analyzing two possible capital structuresN30 and 50 percent debt ratios. The firm has total

assets of $5,000,000 and common stock valued at $50 per share. The firm has a marginal tax rate of

40 percent on ordinary income. If the interest rate on debt is 7 percent and 9 percent for the 30

percent and the 50 percent debt ratios, respectively, the amount of interest on the debt under each

of the capital structures being considered would be

A) 30 percent debt ratio: $135,000 and 50 percent debt ratio: $175,000.

B) 30 percent debt ratio: $105,000 and 50 percent debt ratio: $250,000.

C) 30 percent debt ratio: $245,000 and 50 percent debt ratio: $225,000.

D) 30 percent debt ratio: $105,000 and 50 percent debt ratio: $225,000.

324) 24) A firm is analyzing two possible capital structuresN30 and 50 percent debt ratios. The firm has total

assets of $5,000,000 and common stock valued at $50 per share. The firm has a marginal tax rate of

40 percent on ordinary income. The number of common shares outstanding for each of the capital

structures would be

A) 30 percent debt ratio: 50,000 shares and 50 percent debt ratio: 70,000 shares.

B) 30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 100,000 shares.

C) 30 percent debt ratio: 30,000 shares and 50 percent debt ratio: 50,000 shares.

D) 30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 50,000 shares.

25) Nico Trading Company must choose its optimal capital structure. Currently, the firm has a 20 25)

percent debt ratio and the firm expects to generate a dividend next year of $5.44 per share.

Dividends are expected to remain at this level indefinitely. Stockholders currently require a 12.1

percent return on their investment. Nico is considering changing its capital structure if it would

benefit shareholders. The firm estimates that if it increases the debt ratio to 30 percent, it will

increase its expected dividend to $5.82 per share. Again, dividends are expected to remain at this

new level indefinitely. However, because of the added risk, the required return demanded by

stockholders will increase to 12.6 percent. Based on this information, should Nico make the change?

A) Yes. B) No.

C) It's irrelevant. D) Not enough information.

Exam 3


The ________ is a weighted average of the cost of funds which reflects the interrelationship of financing decisions.AnswerSelected Answer: cost of

capitalCorrect Answer: cost of

capital Question 2

4 out of 4 points

If a firm's variable costs per unit increase, the firm's operating breakeven point willAnswerSelected Answer: increa

se.Correct Answer: increa

se. Question 3

0 out of 4 points

A firm is analyzing two possible capital structures 30 and 50 percent debt ratios. The firm has total assets of $5,000,000 and common stock valued at $50 per share. The firm has a marginal tax rate of 40 percent on ordinary income. If the interest rate on debt is 7 percent and 9 percent for the 30 percent and the 50 percent debt ratios, respectively, the amount of interest on the debt under each of the capital structures being considered would beAnswerSelected Answer: 30 percent debt ratio: $105,000 and 50 percent debt

ratio: $250,000.Correct Answer: 30 percent debt ratio: $105,000 and 50 percent debt

ratio: $225,000. Question 4

4 out of 4 points

Nico Trading Corporation is considering issuing long-term debt. The debt would have a 30 year maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm's tax rate is 35 percent. Given this information, the after tax cost of debt for Nico Trading would beAnswerSelected Answer: 7.26

%.Correct Answer: 7.26

%. Question 5

4 out of 4 points

A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions:

The weighted average cost of capital isAnswerSelected Answer: 11

percent.Correct Answer: 11

percent. Question 6

4 out of 4 points

A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of the preferred stock isAnswerSelected Answer: 12.4

percent.Correct Answer:

12.4 percent.


The ________ is the rate of return required by the market suppliers of capital in order to attract their funds to the firm.AnswerSelected Answer: cost of

capitalCorrect Answer: cost of

capital Question 8

4 out of 4 points

The basic shortcoming of the EBIT-EPS approach to capital structure isAnswerSelected Answer: that it concentrates on the maximization of EPS rather than

the maximization of owner's wealth.Correct Answer: that it concentrates on the maximization of EPS rather than

the maximization of owner's wealth. Question 9

4 out of 4 points

Firms underprice new issues of common stock for the following reason(s).AnswerSelected Answer: all of the

above.Correct Answer: all of the

above. Question 10

4 out of 4 points

A firm has interest expense of $145,000, preferred dividends of $25,000, and a tax rate of 40 percent. The firm's financial breakeven

point isAnswerSelected Answer: $186,6

67.Correct Answer: $186,6

67. Question 11

4 out of 4 points

A firm's operating breakeven point is sensitive to all of the following variables EXCEPTAnswerSelected Answer: interest

expense.Correct Answer: interest

expense. Question 12

4 out of 4 points

The cost of each type of capital depends on theAnswerSelected Answer: all of the

above.Correct Answer: all of the

above. Question 13

4 out of 4 points

If a corporation has an average tax rate of 40 percent, the approximate, annual, after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950 isAnswerSelected Answer: 7.6

percent.Correct

Answer: 7.6 percent.


The cost of capital reflects the cost of fundsAnswerSelected Answer: over a long-run time

period.Correct Answer: over a long-run time

period. Question 15

4 out of 4 points

What would be the cost of new common stock equity for Tangshan Mining if the firm just paid a dividend of $4.25, the stock price is $55.00, dividends are expected to grow at 8.5 percent indefinitely, and flotation costs are $6.25 per share?AnswerSelected Answer: 17.96

%.Correct Answer: 17.96

%. Question 16

4 out of 4 points

At the operating breakeven point, ________ equals zero.AnswerSelected Answer: earnings before interest

and taxesCorrect Answer: earnings before interest

and taxes Question 17

4 out of 4 points

________ is the risk to the firm of being unable to cover financial obligations.AnswerSelected Answer: Financial

riskCorrect Answer: Financial

risk Question 18

4 out of 4 points

________ is the potential use of fixed financial charges to magnify the effects of changes in earnings before interest and taxes on the firm's earnings per share.AnswerSelected Answer: Financial

leverageCorrect Answer: Financial

leverage Question 19

4 out of 4 points

Poor capital structure decisions can result in ________ the cost of capital, resulting in ________ acceptable investments. Effective capital structure decisions can ________ the cost of capital, resulting in ________ acceptable investments.AnswerSelected Answer: increasing; fewer;

lower; moreCorrect Answer: increasing; fewer;

lower; more Question 20

4 out of 4 points

A firm has a current capital structure consisting of $400,000 of 12 percent annual interest debt and 50,000 shares of common stock. The firm's tax rate is 40 percent on ordinary income. If the EBIT is expected to be $200,000, the firm's earnings per share will be

________.AnswerSelected Answer: $1.8

2Correct Answer: $1.8

2 Question 21

4 out of 4 points

If a firm's fixed financial costs decrease, the firm's operating breakeven point willAnswerSelected Answer: remain

unchanged.Correct Answer: remain

unchanged. Question 22

4 out of 4 points

The cost of new common stock financing is higher than the cost of retained earnings due toAnswerSelected Answer: flotation costs and

underpricing.Correct Answer: flotation costs and

underpricing. Question 23

4 out of 4 points

As fixed operating costs increase and all other factors are held constant, the degree of operating leverage willAnswerSelected Answer: increa

se.Correct

Answer: increase.


A firm has fixed operating costs of $253,750, a sales price per unit of $100, and a variable cost per unit of $65. The firm's operating breakeven point in dollars isAnswerSelected Answer: $725,0

00.Correct Answer: $725,0

00. Question 25

4 out of 4 points

A firm has fixed operating costs of $175,000, total sales revenue of $3,000,000 and total variable costs of $2,250,000. The firm's degree of operating leverage is ________.AnswerSelected Answer: 1.3

0Correct Answer: 1.3

0Thursday, April 26, 2012 7:08:23 PM CDTOK

Exam Chap 13

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