Corporate Finance and Accounting Concepts HW1 Questions

O.V.
HW1
Question 1
0.5 out of 0.5 points
"Double taxation" refers to:

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Answer:
paying taxes on profits at the corporate level and dividends at the personal
level.
Response correct
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 Question 2
A chief financial officer would typically:

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supervise both the treasurer and controller.
Response correct
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 Question 3
Agency problems can best be characterized as:

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differing incentives between managers and owners.
Response correct
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 Question 4
An example of a firm's financing decision would be:

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Answer:
the issuance of ten-year versus twenty-year bonds.
Response correct
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 Question 5
Corporate managers are expected to make corporate decisions that are in the best interest of:
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the corporation's shareholders.
Response correct
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 Question 6
Financial markets are used for trading:

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securities, such as shares of IBM.
Response correct
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 Question 7
Firms can alter their capital structure by:

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issuing stock to repay debt.
Response correct
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 Question 8
In a large corporation, budget preparation would most likely be conducted by the:

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controller.
Response correct
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 Question 9
Investment banks like Goldman Sachs:

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help companies sell their securities to investors.
Response correct
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 Question 10
Long-term financing arrangements occur in the:
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capital markets.
Response correct
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 Question 11
The overall goal of capital budgeting projects should be to:

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increase the wealth of the firm's shareholders.
Response correct
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 Question 12
The primary goal of corporate management should be to:

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maximize the shareholders' wealth.
Response correct
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 Question 13
When a corporation fails, the maximum that can lost by an investor protected by limited
liability is:
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the amount of the initial investment.
Response correct
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 Question 14
When managers' compensation plans are tied in a meaningful manner to the profits of the
firm, agency problems:
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can be reduced.
Response correct
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 Question 15
When the management of a business is conducted by individuals other than the owners, the
business is more likely to be a:
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corporation.
Response correct
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 Question 16
Which of the firm's financial managers is most likely to be involved with obtaining financing
for the firm?
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Answer:
Treasurer
Response correct
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 Question 17
Which of the following is NOT a financing decision?

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Should the firm shut down an unprofitable factory?
Response correct
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 Question 18
Which of the following would be considered a capital budgeting decision?

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A decision to expand into a new line of products, at a cost of $5 million
Response correct
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 Question 19
Which of the following would be considered an advantage of the sole proprietorship form of
organization?
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Answer:
Profits taxed at only one level
Response correct
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 Question 20
Which of the following would correctly differentiate general partners from limited partners in
a limited partnership?
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Answer:
General partners have unlimited personal liability.
Response correct
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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?
Answer

Selected
Answer:
$17 million
Response correct
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 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 correct
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 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
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 Question 4
A times interest earned ratio of 5.0 indicates that the firm:

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earns significantly more than its interest obligations.
Response correct
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 Question 5
How would you interpret an inventory turnover ratio of 10.7?

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The firm has sufficient inventories to maintain sales for 34.2 days.
Response correct
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 Question 6
If a firm's cash coverage ratio is greater than its times interest earned ratio, then:
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the firm's assets are not fully depreciated.
Response correct
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 Question 7
If a firm's total debt ratio is greater than .5, then:

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its debt-equity ratio exceeds 1.0.
Response correct
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 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?
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Answer:
Equity increased by 50%.
Response
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 Question 9
The shareholders' equity as shown on a corporate balance sheet belongs to the:

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Answer:
common shareholders.
Response correct
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 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?
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Selected
Answer:
$3,000,000
Response
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 Question 11
What is the approximate total debt ratio for a firm with a total debt to equity ratio of .65?
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Selected
Answer:
39%
Response If total debt/equity = .65
Feedback:
then total liabilities/total assets = .65/1.65
= 39.39%
 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
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 Question 13
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 Total capital x cost of capital
Feedback:
$1 million x .2 = $200,000
Residual income = Net Income - Cost of Capital
= 300,000 - 200,000 = $100,000
 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:
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Answer:
remain constant.
Response
ROE = leverage ratio x asset turnover ratio x profit margin
Feedback:
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
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?
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Answer:
Its average inventory is too high.
Response correct
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 Question 16
Which of the following is not likely to cause a reduction in the NWC turnover ratio?
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Average payables have increased.
Response correct
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 Question 17
Which of the following is correct?

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Answer:
All of these.
Response correct
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 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 ROE = Profit margin x Asset turnover
Feedback:
.16 = Profit margin x 2.50
.064 = Profit margin
 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 correct
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 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 correct
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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 called
Answer

Selected
Answer:
compound interest.
 Question 2
The future value of $200 received today and deposited at 8 percent for three years is
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Selected
Answer:
$252.
 Question 3
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
Indicate which of the following is true about annuities.

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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 is

Answer

Selected
Answer:
$178,571.
 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?
Answer
Selected
Answer:
$144,104
 Question 7
In comparing an ordinary annuity and an annuity due, which of the following is true?
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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 is
Answer

Selected Answer:
$31,292.
 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?
Answer
Selected
Answer:
$190,000
 Question 10
If the present value of a perpetual income stream is increasing, the discount rate must be
Answer

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Answer:
decreasing.
 Question 11
The present value of an ordinary annuity of $350 each year for five years, assuming an
opportunity cost of 4 percent, is
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Answer:
$1,558.
 Question 12
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
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
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
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
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
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
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
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
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
The ________ rate of interest creates equilibrium between the supply of savings and the
demand for investment funds.
Answer

Selected
Answer:
real
 Question 2
________ yield curve reflects higher expected future rates of interest.

Answer

Selected
Answer:
An upward-sloping
 Question 3
Generally, an increase in risk will result in ________ required return or interest rate.
Answer

Selected
Answer:
a higher
 Question 4
Generally, long-term loans have higher interest rates than short-term loans because of
Answer

Selected 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?
Answer
Selected
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 is
Answer
Selected
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?
Answer
Selected
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 ________.
Answer
Selected
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 a
Answer

Selected
Answer:
zero coupon bond.
 Question 10
The ________ feature permits the issuer to repurchase bonds at a stated price prior to
maturity.
Answer

Selected
Answer:
call
 Question 11
The value of a bond is the present value of the

Answer

Selected
Answer:
interest payments and maturity value.
 Question 12
If the required return is less than the coupon rate, a bond will sell at
Answer

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Answer:
a premium.
 Question 13
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
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
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
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
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
________ is secured by real estate.

Answer
Selected
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.
Answer
Selected
Answer:
Subordination; senior debt
 Question 20
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
If bankruptcy were to occur, stockholders would have prior claim on assets over
Answer

Selected
Answer:
no one.
 Question 2
Which of the following terms typically applies to common stock but not to preferred stock?
Answer

Selected
Answer:
Voting rights.
 Question 3
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.
 Question 4
Key differences between common stock and bonds include all of the following EXCEPT
Answer
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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 are
Answer

Selected
Answer:
cumulative.
 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 ________.
Answer

Selected
Answer:
$8.00
 Question 7
The cost of preferred stock is

Answer
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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 EXCEPT

Answer
Selected
Answer:
it gives the holder voting rights which permit selection of the firm's
directors.
 Question 9
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
Which of the following is false?

Answer

Selected
Answer:
Preemptive rights often result in a dilution of ownership.
 Question 11
A proxy statement is
Answer

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Answer:
a statement giving the votes of a stockholder to another party.
 Question 12
An ADR is
Answer
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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 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.
 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
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
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
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
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.
 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
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
________ projects do not compete with each other; the acceptance of one ________ the
others from consideration.
Answer

Selected
Answer:
Independent; does not eliminate
 Question 2
A firm with limited dollars available for capital expenditures is subject to

Answer

Selected Answer:
capital rationing.
 Question 3
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
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
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
Cash flows that could be realized from the best alternative use of an owned asset are called
Answer

Selected
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 is
Answer
Selected
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 is
Answer
Selected
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.)
Answer
Selected
Answer:
$150,000
 Question 10
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.)
Answer
Selected
Answer:
$210,000
 Question 11
Table 8.4
______________________________________________________________________
*Not applicable
For Proposal 2, the book value of the existing asset is ________. (See Table 8.4.)
Answer
Selected
Answer:
$13,600
 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.)
Answer
Selected
Answer:
 Question 13
Table 8.4
______________________________________________________________________
*Not applicable
For Proposal 2, the initial outlay equals ________. (See Table 8.4.)
Answer
Selected
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.)
Answer
Selected
Answer:
$60,000
 Question 15
Table 8.4
______________________________________________________________________
*Not applicable
________. (See Table 8.4.)
Answer
Selected
Answer:
$66,000
 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.)
Answer
Selected
Answer:
 Question 17
Table 8.4
______________________________________________________________________
*Not applicable
For Proposal 3, the initial outlay equals ________. (See Table 8.4.)
Answer
Selected
Answer:
$211,000
 Question 18
Table 8.4
______________________________________________________________________

*Not applicable
For Proposal 3, the incremental depreciation expense for year 3 is ________. (See Table 8.4.)
Answer
Selected
Answer:
$47,850
 Question 19
Table 8.4
______________________________________________________________________

*Not applicable
________. (See Table 8.4.)
Answer
Selected
Answer:
$109,140
 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 is
Answer
Selected Answer:
$16,000.
H/W 8
 Question 1
Which of the following capital budgeting techniques ignores the time value of money?
Answer

Selected
Answer:
Payback.
 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?
Answer
Selected
Answer:
Yes.
 Question 3
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
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
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
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
Answer
Selected
Answer:
$1,700,000.
 Question 7
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
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
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
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
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
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
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
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
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
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
When the net present value is negative, the internal rate of return is ________ the cost of
capital.
Answer

Selected
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)
Answer
Selected
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)
Answer
Selected
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 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.
 Question 9
4 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 ________.
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.
 Question 12
4 out of 4 points
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:
 Question 17
4 out of 4 points
Table 8.5
The initial outlay equals ________. (See Table 8.5)

Answer
Selected
Answer:
$44,100
 Question 18
4 out of 4 points
Table 8.5
The incremental depreciation expense for year 1 is ________. (See Table 8.5)
Answer
Selected
Answer:
$7,600
 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)
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
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 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
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.)
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.)
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
 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.
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).
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
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O.V.

"Double taxation" refers to:

A chief financial officer would typically:

Agency problems can best be characterized as:

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

Financial markets are used for trading:

Firms can alter their capital structure by:

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

Investment banks like Goldman Sachs:

The overall goal of capital budgeting projects should be to:

The primary goal of corporate management should be to:

Selected Answer:

Which of the following is NOT a financing decision?

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

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

How would you interpret an inventory turnover ratio of 10.7?

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

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

1.667 = Asset turnover

1.667 = Asset turnover

Which of the following is correct?

Indicate which of the following is true about annuities.

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

A generous philanthropist plans to make a one-time endowment to a renowned heart research

Selected Answer:

Selected Answer:

Multiple Choice: All of the following are key strength...

tie management compensation to the performance of the company's

________ yield curve reflects higher expected future rates of interest.

The value of a bond is the present value of the

________ is secured by real estate.

________ is a stipulation in a long-term debt agreement that subsequent or less important

The cost of preferred stock is

All of the following are characteristics of preferred stock EXCEPT

Which of the following is false?

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

Selected Answer:

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

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

Equity capital can be raised through

The initial outlay equals ________. (See Table 8.5)

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.

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.

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)

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

the preferred stock is

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

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

debt for Nico Trading would be

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

indefinitely, and flotation costs are $6.25 per share?

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

the firm's common stock equity is

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

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