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HW1 Question 1

0.5 out of 0.5 points

**"Double taxation" refers to:
**

Answer Selected Answer:

**paying taxes on profits at the corporate level and dividends at the personal level. correct
**

0.5 out of 0.5 points

Response Feedback:

Question 2

**A chief financial officer would typically:
**

Answer Selected Answer:

**supervise both the treasurer and controller.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 3

**Agency problems can best be characterized as:
**

Answer Selected Answer:

**differing incentives between managers and owners.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 4

**An example of a firm's financing decision would be:
**

Answer Selected Answer:

**the issuance of ten-year versus twenty-year bonds.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 5

**Corporate managers are expected to make corporate decisions that are in the best interest of:
**

Answer

Selected Answer:

**the corporation's shareholders.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 6

**Financial markets are used for trading:
**

Answer Selected Answer:

**securities, such as shares of IBM.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 7

**Firms can alter their capital structure by:
**

Answer Selected Answer:

**issuing stock to repay debt.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 8

**In a large corporation, budget preparation would most likely be conducted by the:
**

Answer Selected Answer:

controller.

Response Feedback:

correct

0.5 out of 0.5 points

Question 9

**Investment banks like Goldman Sachs:
**

Answer Selected Answer:

**help companies sell their securities to investors.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 10

**Long-term financing arrangements occur in the:
**

Answer Selected Answer:

capital markets.

Response Feedback:

correct

0.5 out of 0.5 points

Question 11

**The overall goal of capital budgeting projects should be to:
**

Answer Selected Answer:

**increase the wealth of the firm's shareholders.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 12

**The primary goal of corporate management should be to:
**

Answer Selected Answer:

**maximize the shareholders' wealth.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 13

**When a corporation fails, the maximum that can lost by an investor protected by limited liability is:
**

Answer Selected Answer:

**the amount of the initial investment.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 14

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

Answer Selected Answer:

can be reduced.

Response Feedback:

correct

0.5 out of 0.5 points

Question 15

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

Answer Selected Answer:

corporation.

Response Feedback:

correct

0.5 out of 0.5 points

Question 16

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

Answer Selected Answer:

Treasurer

Response Feedback:

correct

0.5 out of 0.5 points

Question 17

**Which of the following is NOT a financing decision?
**

Answer Selected Answer:

**Should the firm shut down an unprofitable factory?
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 18

**Which of the following would be considered a capital budgeting decision?
**

Answer Selected Answer:

**A decision to expand into a new line of products, at a cost of $5 million
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 19

**Which of the following would be considered an advantage of the sole proprietorship form of organization?
**

Answer Selected Answer:

**Profits taxed at only one level
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 20

**Which of the following would correctly differentiate general partners from limited partners in a limited partnership?
**

Answer Selected Answer:

**General partners have unlimited personal liability.
**

Response Feedback:

correct

HW4

Question 1

0.5 out of 0.5 points

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?

Answer Selected Answer:

$17 million

Response Feedback:

correct

0.5 out of 0.5 points

Question 2

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?

Answer Selected Answer:

**Net working capital will not change.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 3

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?

Answer Selected Answer:

$500,000

Response Feedback:

Question 4

0.5 out of 0.5 points

**A times interest earned ratio of 5.0 indicates that the firm:
**

Answer

Selected Answer:

**earns significantly more than its interest obligations.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 5

**How would you interpret an inventory turnover ratio of 10.7?
**

Answer Selected Answer:

**The firm has sufficient inventories to maintain sales for 34.2 days.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 6

**If a firm's cash coverage ratio is greater than its times interest earned ratio, then:
**

Answer Selected Answer:

**the firm's assets are not fully depreciated.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 7

**If a firm's total debt ratio is greater than .5, then:
**

Answer Selected Answer:

**its debt-equity ratio exceeds 1.0.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 8

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?

Answer Selected Answer:

**Equity increased by 50%.
**

Response Feedback:

Question 9

0.5 out of 0.5 points

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

Answer Selected Answer:

common shareholders.

Response Feedback:

correct

0.5 out of 0.5 points

Question 10

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?

Answer Selected Answer:

**$3,000,000
**

Response Feedback:

Question 11

0.5 out of 0.5 points

**What is the approximate total debt ratio for a firm with a total debt to equity ratio of .65?
**

Answer Selected Answer:

39%

Response Feedback:

**If total debt/equity = .65 then total liabilities/total assets = .65/1.65 = 39.39%
**

0.5 out of 0.5 points

Question 12

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?

Answer Selected Answer:

$90.00

Response Feedback:

Question 13

0.5 out of 0.5 points

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?

Answer Selected Answer:

$100,000

Response Feedback:

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

0.5 out of 0.5 points

Question 14

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:

Answer Selected Answer:

remain constant.

Response Feedback:

ROE = leverage ratio x asset turnover ratio x profit margin Old 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

0.5 out of 0.5 points

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?

Answer Selected Answer:

**Its average inventory is too high.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 16

**Which of the following is not likely to cause a reduction in the NWC turnover ratio?
**

Answer Selected Answer:

**Average payables have increased.
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 17

**Which of the following is correct?
**

Answer Selected Answer:

All of these.

Response Feedback:

correct

0.5 out of 0.5 points

Question 18

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
**

0.5 out of 0.5 points

Question 19

**Which of the following will increase a firm's times interest earned ratio?
**

Answer Selected Answer:

**A decrease in cost of goods sold
**

Response Feedback:

correct

0.5 out of 0.5 points

Question 20

**Which of the following would be most detrimental to a firm's current ratio if that ratio is currently 2.0?
**

Answer Selected Answer:

**Pay off a portion of long-term debt with cash.
**

Response Feedback:

correct

H/W 5

Question 1

0.5 out of 0.5 points

When the amount earned on a deposit has become part of the principal at the end of a specified time period the concept is called

Answer Selected Answer:

compound interest.

Question 2

0.5 out of 0.5 points

**The future value of $200 received today and deposited at 8 percent for three years is
**

Answer Selected Answer:

$252.

Question 3

0.5 out of 0.5 points

**The present value of $100 to be received 10 years from today, assuming an opportunity cost of 9 percent, is
**

Answer Selected Answer:

$42.

Question 4

0.5 out of 0.5 points

**Indicate which of the following is true about annuities.
**

Answer Selected Answer:

**An annuity due is an equal payment paid or received at the beginning of each period.
**

0.5 out of 0.5 points

Question 5

**The present value of a $25,000 perpetuity at a 14 percent discount rate is
**

Answer Selected Answer:

$178,571.

Question 6

0.5 out of 0.5 points

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?

Answer Selected Answer:

$144,104

Question 7

0.5 out of 0.5 points

**In comparing an ordinary annuity and an annuity due, which of the following is true?
**

Answer Selected Answer:

The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.

Question 8

0.5 out of 0.5 points

The future value of a $2,000 annuity due deposited at 8 percent compounded annually for each of the next 10 years is

Answer Selected Answer:

$31,292.

Question 9

0.5 out of 0.5 points

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?

Answer Selected Answer:

$190,000

Question 10

0.5 out of 0.5 points

**If the present value of a perpetual income stream is increasing, the discount rate must be
**

Answer Selected Answer:

decreasing.

Question 11

0.5 out of 0.5 points

The present value of an ordinary annuity of $350 each year for five years, assuming an opportunity cost of 4 percent, is

Answer Selected Answer:

$1,558.

Question 12

0.5 out of 0.5 points

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?

Answer Selected Answer:

**$3,125,000
**

Question 13

0.5 out of 0.5 points

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?

Answer Selected Answer:

$ 2,985.18

Question 14

0.5 out of 0.5 points

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?

Answer Selected Answer:

$ 2,985.18

Question 15

0.5 out of 0.5 points

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

Answer Selected Answer:

$253.00

Question 16

0.5 out of 0.5 points

**The future value of an annuity of $1,000 each quarter for 10 years, deposited at 12 percent compounded quarterly is
**

Answer Selected Answer:

$75,401.

Question 17

0.5 out of 0.5 points

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

Answer Selected Answer:

$ 1,482.

Question 18

0.5 out of 0.5 points

The rate of return earned on an investment of $50,000 today that guarantees an annuity of $10,489 for six years is approximately

Answer Selected Answer:

7%.

Question 19

0.5 out of 0.5 points

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?

Answer Selected Answer:

5.98%

Question 20

0.5 out of 0.5 points

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 EXCEPT

limited 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 because

profits 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 summary sta...
**

Question The ________ represents a summary statement of the firm's financial position

at a given point in time. Answer income statement statement of retained earnings statement of cash flows balance sheet

**4. Multiple Choice: Firm ABC had operating profits of $10...
**

Create Question Reuse Question Upload Questions Question Settings Question Firm ABC had operating profits of $100,000, taxes of $17,000, interest

expense of $34,000 and preferred dividends of $5,000. What was the firm's net profit after taxes? $49,000

$83,000 $66,000 $44,000

**5. Multiple Choice: Candy Corporation had pretax profits ...
**

Question Candy Corporation had pretax profits of $1.2 million, an average tax rate of 34

percent, and it paid preferred stock dividends of $50,000. There were 100,000 shares outstanding and no interest expense. What were Candy Corporation's earnings per share? $7.42 $4.52 $7.59 $3.91

**6. 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 taxes of $100,000 in 2005. The firm paid dividends in 2005 of ________. $80,000 $20,000 $0 $100,000

**7. 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 shareholders net profit margin gross profit margin operating profit margin

**8. 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 assets

of $1,500,000, and total liabilities of $750,000 has a return on equity of 20 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, an

increase in financial leverage will result in ________ in the return on equity. no change a decrease an undetermined change an increase

**10. 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 maximum

contribution of $2,000 at the end of each year for the next 10 years. If Dan can earn 10 percent on his contributions, how much will he have at the end of the tenth year? $51,880 $12,290 $31,874

$20,000

**12. Multiple Choice: In comparing an ordinary annuity and ...
**

Question In comparing an ordinary annuity and an annuity due, which of the following is

true? The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity. The future value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due. The future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due. All things being equal, one would prefer to receive an ordinary annuity compared 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 percent

compounded 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 to have 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 of inventory is ________. 10; 36.5 36.5; 10 36.0; 10 10; 36.0

**16. Multiple Choice: A firm with a gross profit margin whi...
**

Question A firm with a gross profit margin which meets industry standard and a net

profit margin which is below industry standard must have excessive dividend 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 total

assets by decreasing 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 best

interest of the stockholders is to

tie management compensation to the performance of the company's common 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 deposit h...
**

Question When the amount earned on a deposit has become part of the principal at the

end of a specified time period the concept is called compound 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 compounded

annually 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 shares

outstanding, a book value of equity of $3,000,000, and a market/book ratio of 3.0? Answer Correct Feedback Incorrect Feedback $8.57 $30.00 $90.00 $105.00

**22. Multiple Choice: A college received a contribution to ...
**

Question 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? $18,000 $190,000 $95,000 $19,000

**23. Multiple Choice: What is the residual income for a fir...
**

Points Update Hide Question Details Select: 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 $500,000

**24. Multiple Choice: Adam borrows $4,500 at 12 percent ann...
**

Question Adam borrows $4,500 at 12 percent annually compounded interest to be

repaid 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? Answer Correct Feedback correct Incorrect Feedback incorrect

An increase in debt A decrease in cost of goods sold An increase in interest expense A decrease in net income

H/W 6

Question 1

0.5 out of 0.5 points

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

Answer Selected Answer:

real

Question 2

0.5 out of 0.5 points

**________ yield curve reflects higher expected future rates of interest.
**

Answer Selected Answer:

**An upward-sloping
**

Question 3

0.5 out of 0.5 points

**Generally, an increase in risk will result in ________ required return or interest rate.
**

Answer Selected Answer:

a higher

Question 4

0.5 out of 0.5 points

**Generally, long-term loans have higher interest rates than short-term loans because of
**

Answer Selected Answer:

**all of the above.
**

Question 5

0.5 out of 0.5 points

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?

Answer Selected Answer:

1%

Question 6

0.5 out of 0.5 points

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 is

Answer Selected Answer:

downward sloping.

Question 7

0.5 out of 0.5 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?

Answer Selected Answer:

11%

Question 8

0.5 out of 0.5 points

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 ________.

Answer Selected Answer:

**nominal return on investment is more than 15 percent
**

Question 9

0.5 out of 0.5 points

**Another name for a deeply discounted bond that pays no coupon interest is a
**

Answer Selected Answer:

**zero coupon bond.
**

Question 10

0.5 out of 0.5 points

**The ________ feature permits the issuer to repurchase bonds at a stated price prior to maturity.
**

Answer Selected Answer:

call

Question 11

0.5 out of 0.5 points

**The value of a bond is the present value of the
**

Answer Selected Answer:

**interest payments and maturity value.
**

Question 12

0.5 out of 0.5 points

**If the required return is less than the coupon rate, a bond will sell at
**

Answer Selected Answer:

a premium.

Question 13

0.5 out of 0.5 points

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.

Answer Selected Answer:

$1,268.20

Question 14

0.5 out of 0.5 points

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.

Answer Selected Answer:

$840.67

Question 15

0.5 out of 0.5 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.

Answer Selected Answer:

$656.77

Question 16

0.5 out of 0.5 points

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?

Answer Selected Answer:

$15,505

Question 17

0.5 out of 0.5 points

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?

Answer Selected Answer:

7.00%

Question 18

0.5 out of 0.5 points

**________ is secured by real estate.
**

Answer Selected Answer:

A mortgage bond

Question 19

0.5 out of 0.5 points

________ 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.

Answer Selected Answer:

**Subordination; senior debt
**

Question 20

0.5 out of 0.5 points

A ________ is a complex and lengthy legal document stating the conditions under which a

**bond has been issued.
**

Answer Selected Answer:

bond indenture

H/W 7

Question 1

0.5 out of 0.5 points

**If bankruptcy were to occur, stockholders would have prior claim on assets over
**

Answer Selected Answer:

no one.

Question 2

0.5 out of 0.5 points

**Which of the following terms typically applies to common stock but not to preferred stock?
**

Answer Selected Answer:

Voting rights.

Question 3

0.5 out of 0.5 points

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

Answer Selected Answer:

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

0.5 out of 0.5 points

Question 4

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

Answer Selected Answer:

**dividends paid to bondholders are tax-deductible but interest paid to stockholders is not.
**

0.5 out of 0.5 points

Question 5

Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common stockholders are

Answer Selected Answer:

cumulative.

Question 6

0.5 out of 0.5 points

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

Answer Selected Answer:

$8.00

Question 7

0.5 out of 0.5 points

**The cost of preferred stock is
**

Answer Selected Answer:

higher than the cost of long-term debt and lower than the cost of common stock.

0.5 out of 0.5 points

Question 8

**All of the following are characteristics of preferred stock EXCEPT
**

Answer Selected Answer:

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

Question 9

0.5 out of 0.5 points

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.

Answer Selected Answer:

$36/share

Question 10

0.5 out of 0.5 points

**Which of the following is false?
**

Answer Selected Answer:

**Preemptive rights often result in a dilution of ownership.
**

Question 11

0.5 out of 0.5 points

A proxy statement is

Answer Selected Answer:

**a statement giving the votes of a stockholder to another party.
**

Question 12

0.5 out of 0.5 points

An ADR is

Answer Selected 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.

0.5 out of 0.5 points

Question 13

**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.
**

0.5 out of 0.5 points

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 ________.

Answer Selected Answer:

$25

Question 15

0.5 out of 0.5 points

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 ________.

Answer Selected Answer:

8.00%

Question 16

0.5 out of 0.5 points

**In the Gordon model, the value of the common stock is the
**

Answer

Selected Answer:

**present value of a constant, growing dividend stream.
**

Question 17

0.5 out of 0.5 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 ________.

Answer Selected Answer:

$56.00

Question 18

0.5 out of 0.5 points

**If expected return is less than required return on an asset, rational investors will
**

Answer Selected Answer:

sell the asset, which will drive the price down and cause the expected return to reach the level of the required return.

0.5 out of 0.5 points

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?

Answer Selected Answer:

8%

Question 20

0.5 out of 0.5 points

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?

Answer Selected Answer:

8.6%

h/w 9

Question 1

0.5 out of 0.5 points

________ projects do not compete with each other; the acceptance of one ________ the others from consideration.

Answer Selected Answer:

**Independent; does not eliminate
**

Question 2

0.5 out of 0.5 points

**A firm with limited dollars available for capital expenditures is subject to
**

Answer Selected Answer:

capital rationing.

Question 3

0.5 out of 0.5 points

**A conventional cash flow pattern associated with capital investment projects consists of an initial
**

Answer Selected Answer:

**outflow followed by a series of inflows.
**

Question 4

0.5 out of 0.5 points

The ordering of capital expenditure projects on the basis of some predetermined measure such as the rate of return is called

Answer Selected Answer:

**the ranking approach.
**

Question 5

0.5 out of 0.5 points

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.

Answer Selected Answer:

incremental

Question 6

0.5 out of 0.5 points

Cash flows that could be realized from the best alternative use of an owned asset are called

Answer Selected Answer:

opportunity costs.

Question 7

0.5 out of 0.5 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 is

Answer Selected Answer:

**an increase of $60,000.
**

Question 8

0.5 out of 0.5 points

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 is

Answer Selected Answer:

**$7,720 tax liability.
**

Question 9

0.5 out of 0.5 points

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.)
**

Answer Selected Answer:

$150,000

Question 10

0.5 out of 0.5 points

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 annual incremental after-tax cash flow from operations for year 1 is ________. (See Table 8.4.)

Answer Selected Answer:

$210,000

Question 11

0.5 out of 0.5 points

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 2, the book value of the existing asset is ________. (See Table 8.4.)
**

Answer Selected Answer:

$13,600

Question 12

0.5 out of 0.5 points

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 2, the tax effect on the sale of the existing asset results in ________. (See Table 8.4.)

Answer Selected Answer:

**$14,560 tax liability.
**

Question 13

0.5 out of 0.5 points

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 2, the initial outlay equals ________. (See Table 8.4.)
**

Answer Selected Answer:

**$164,560 cash outflow.
**

Question 14

0.5 out of 0.5 points

______________________________________________________________________

*Not applicable

**For Proposal 2, the incremental depreciation expense for year 2 is ________. (See Table 8.4.)
**

Answer Selected Answer:

$60,000

Question 15

0.5 out of 0.5 points

______________________________________________________________________

*Not applicable

For Proposal 2, the annual incremental after-tax cash flow from operations for year 2 is ________. (See Table 8.4.)

Answer Selected Answer:

$66,000

Question 16

0.5 out of 0.5 points

______________________________________________________________________

*Not applicable

For Proposal 3, the tax effect on the sale of the existing asset results in ________. (See Table 8.4.)

Answer Selected Answer:

**$16,000 tax liability.
**

Question 17

0.5 out of 0.5 points

______________________________________________________________________

*Not applicable

**For Proposal 3, the initial outlay equals ________. (See Table 8.4.)
**

Answer Selected Answer:

$211,000

Question 18

0.5 out of 0.5 points

______________________________________________________________________

*Not applicable

**For Proposal 3, the incremental depreciation expense for year 3 is ________. (See Table 8.4.)
**

Answer

Selected Answer:

$47,850

Question 19

0.5 out of 0.5 points

______________________________________________________________________

*Not applicable

For Proposal 3, the annual incremental after-tax cash flow from operations for year 3 is ________. (See Table 8.4.)

Answer Selected Answer:

$109,140

Question 20

0.5 out of 0.5 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 $15,000. The machine has an original purchase price of $80,000, installation cost of $20,000, and will be depreciated under the fiveyear 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 is

Answer Selected Answer:

$16,000.

H/W 8

Question 1

0.5 out of 0.5 points

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

Answer

Selected Answer:

Payback.

Question 2

0.5 out of 0.5 points

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?

Answer Selected Answer:

Yes.

Question 3

0.5 out of 0.5 points

**The minimum return that must be earned on a project in order to leave the firm's value unchanged is
**

Answer Selected Answer:

**the cost of capital.
**

Question 4

0.5 out of 0.5 points

**A firm would accept a project with a net present value of zero because
**

Answer Selected Answer:

**the project would maintain the wealth of the firm's owners.
**

Question 5

0.5 out of 0.5 points

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?

Answer Selected Answer:

($137,053).

Question 6

0.5 out of 0.5 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?

Answer Selected Answer:

**$1,700,000.
**

Question 7

0.5 out of 0.5 points

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

**The firm should
**

Answer Selected Answer:

**accept Projects 1 and 2 and reject Project 3.
**

Question 8

0.5 out of 0.5 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?

Answer Selected Answer:

13.57%.

Question 9

0.5 out of 0.5 points

There is sometimes a ranking problem among NPV and IRR when selecting among mutually exclusive investments. This ranking problem only occurs when

Answer Selected Answer:

**the cost of capital is to the left of the crossover point.
**

Question 10

0.5 out of 0.5 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 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?

Answer Selected Answer:

Neither.

Question 11

0.5 out of 0.5 points

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

Answer Selected Answer:

**internal rate of return
**

Question 12

0.5 out of 0.5 points

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 should
**

Answer Selected Answer:

**accept Projects 2 and 3 and reject Project 1.
**

Question 13

0.5 out of 0.5 points

The underlying cause of conflicts in ranking for projects by internal rate of return and net present value methods is

Answer Selected Answer:

**the reinvestment rate assumption regarding intermediate cash flows.
**

Question 14

0.5 out of 0.5 points

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?

Answer Selected Answer:

NPV.

Question 15

0.5 out of 0.5 points

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 should
**

Answer Selected Answer:

**accept project A and reject B.
**

Question 16

0.5 out of 0.5 points

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

Answer Selected Answer:

**reject project A and accept B.
**

Question 17

0.5 out of 0.5 points

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

Answer Selected Answer:

less than

Question 18

0.5 out of 0.5 points

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)
**

Answer Selected Answer:

1, 2, 3, and 5

Question 19

0.5 out of 0.5 points

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)

Answer Selected Answer:

1, 3, 5, and 6

Question 20

0.5 out of 0.5 points

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 should

Answer Selected 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 be
**

Answer Selected 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?

Answer Selected 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.

Answer Selected 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.

Answer Selected 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?

Answer Selected Answer:

14.54%

Question 6

4 out of 4 points

**Equity capital can be raised through
**

Answer Selected 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?

Answer Selected Answer:

$24,000

Question 8

4 out of 4 points

An ADR is

Answer Selected 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.

4 out of 4 points

Question 9

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 ________.

Answer Selected Answer:

$12

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 ________.

Answer Selected Answer:

$56.00

Question 11

4 out of 4 points

**If expected return is less than required return on an asset, rational investors will
**

Answer Selected Answer:

sell the asset, which will drive the price down and cause the expected return to reach the level of the required return.

4 out of 4 points

Question 12

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?

Answer Selected 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.)

Answer Selected 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 be

Answer Selected 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 is

Answer Selected 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)
**

Answer Selected Answer:

**$1,100 tax liability.
**

Question 17

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 initial outlay equals ________. (See Table 8.5)
**

Answer Selected Answer:

$44,100

Question 18

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 incremental depreciation expense for year 1 is ________. (See Table 8.5)
**

Answer Selected Answer:

$7,600

Question 19

4 out of 4 points

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

Answer Selected Answer:

$16,600

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 fiveyear 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 is

Answer Selected Answer:

$8,200.

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?

Answer

Selected 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?

Answer Selected 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?

Answer Selected Answer:

**$1,700,000.
**

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?

Answer Selected 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 to

Answer Selected Answer:

the project's internal rate of return.

H/W 13

Name___________________________________

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.) A) 11.6 percent. B) 16.6 percent. C) 15.5 percent. D) 17.5 percent. 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.) A) 17.5 percent. B) 11.7 percent. C) 15.8 percent. D) 13.5 percent. 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) A) change in an undetermined direction. B) decrease. C) increase. D) remain unchanged. 4) If a firm's fixed financial costs decrease, the firm's operating breakeven point will 4) A) change in an undetermined direction. B) decrease. 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

Question 1

4 out of 4 points

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

Answer Selected Answer:

cost of capital

Correct 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 will
**

Answer Selected Answer:

increase.

Correct Answer:

increase.

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 be

Answer Selected 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 be

Answer Selected 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 is
**

Answer Selected 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 is

Answer Selected Answer:

12.4 percent.

Correct Answer:

12.4 percent.

Question 7

4 out of 4 points

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

Answer Selected Answer:

cost of capital

Correct Answer:

cost of capital

Question 8

4 out of 4 points

**The basic shortcoming of the EBIT-EPS approach to capital structure is
**

Answer Selected Answer:

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

Correct Answer:

Question 9

4 out of 4 points

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

Answer Selected 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 is

Answer Selected Answer:

$186,667.

Correct Answer:

$186,667.

Question 11

4 out of 4 points

**A firm's operating breakeven point is sensitive to all of the following variables EXCEPT
**

Answer Selected Answer:

interest expense.

Correct Answer:

interest expense.

Question 12

4 out of 4 points

**The cost of each type of capital depends on the
**

Answer Selected 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 is

Answer Selected Answer:

7.6 percent.

Correct Answer:

7.6 percent.

Question 14

4 out of 4 points

**The cost of capital reflects the cost of funds
**

Answer Selected 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?

Answer Selected Answer:

17.96%.

Correct Answer:

17.96%.

Question 16

4 out of 4 points

**At the operating breakeven point, ________ equals zero.
**

Answer Selected Answer:

**earnings before interest and taxes
**

Correct 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.
**

Answer Selected Answer:

Financial risk

Correct 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.

Answer Selected Answer:

Financial leverage

Correct 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.

Answer Selected Answer:

**increasing; fewer; lower; more
**

Correct 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 ________.

Answer Selected Answer:

$1.82

Correct Answer:

$1.82

Question 21

4 out of 4 points

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

Answer Selected 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 to
**

Answer Selected 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 will

Answer Selected Answer:

increase.

Correct Answer:

increase.

Question 24

4 out of 4 points

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 is

Answer Selected Answer:

$725,000.

Correct Answer:

$725,000.

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 ________.

Answer Selected Answer:

1.30

Correct Answer:

1.30

Thursday, April 26, 2012 7:08:23 PM CDT

OK

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