Professional Documents
Culture Documents
Chapter 11
1. The largest single source of short-term financing for businesses collectively is
________.
A. bank loans
B. commercial paper
* C. trade credit
D. trade acceptances
2. If credit terms are 3/10, net 45, what is the approximate cost of foregoing the
cash discount and paying on the final due date? (Use a 365-day year and round
to nearest percent.)
A. 3%
B. 13%
C. 25%
* D. 32%
Answer = (3/97)[365/(45 - 35)] = 32.25%
3. What is the approximate cost of not taking the cash discount and paying on the
final due date if credit terms are 1/10, net 30? (Use a 365-day year and round
to the nearest percent.)
A. 10%
* B. 18%
C. 22%
D. 30%
5. Suppose a firm establishes a $4 million revolving line of credit with its bank.
As part of its agreement, the firm will pay a commitment fee of 0.5% on the
unused portion of the line. If the average borrowing is $3 million over the
year, the commitment fee will be ________.
* A. $5,000
B. $10,000
C. $15,000
D. $50,000
3. Project GROW will result in the following expected changes in the balance
sheet: (1) an increase in accounts receivable of $20,000, (2) an increase in
inventory of $20,000, and finally (3) an increase in accounts payable of
$15,000. What is the change in net working capital (NWC)?
A. -$25,000
B. -$15,000
C. +$15,000
* D. +$25,000
5. The basic characteristics of relevant project flows include all of the following
except ________.
A. after-tax flows
B. cash flows
* C. financing flows
D. incremental flows
Chapter 13.
1. The payback period method is inferior to the net present value method because
it ________.
A. deals with accounting income rather than cash flows
* B. fails to consider cash flows beyond the payback period
C. assumes that cash flows are uniform over the life of the investment
D. is difficult to compute
2. The initial cost of a conventional project is $14,000. The present value of the
project's cash inflows, discounted at 12 percent, is $12,500. The internal rate
of return is ________.
A. greater than 12 percent
B. equal to 12 percent
* C. less than 12 percent
* D. cannot tell without additional information
5. The internal rate of return method of capital budgeting implicitly assumes that
the cash flows from a project can be reinvested at the ________.
A. required rate of return
B. Treasury bill rate
* C. project's internal rate of return
D. risk-free rate
2. According to the capital asset pricing model, the cost of equity is equal to a
risk-free rate plus the market risk premium adjusted by the appropriate beta.
* True?
False?
4. When calculating the overall cost of capital, component costs should be based
on the ________ costs of various sources of financing.
A. historical
* B. marginal
C. imbedded
D. residual
6. YYY's common stock is currently selling for $45 a share. Last year's dividend
was $2, the firm's marginal tax rate is 34%, and dividends are expected to
grow 5% annually. The cost of equity is ________.
* A. 9.7%
B. 2.2%
C. 9.4%
D. 8.7%
Chapter 16
1. Any time a company has fixed operating costs, a change in the volume of sales can
result in a more than proportional change in operating profit or loss.
* True?
False?
2. A break-even chart shows the relationship among total revenues, total operating
costs, and profits for various levels of production and sales.
* True?
False?
3. "DOL at 2,500 units = 4" means that if sales decrease 3 percent to 2,425 units, EBIT
will decrease by 7 percent.
True?
* False?
4. A company has fixed costs of $50,000 and variable costs per unit of output of $8. If its
sole product sells for $18, what is the break-even quantity of output?
A. 1,500
B. 2,500
C. 5,000
D. 7,500
QBE = FC/(P - V) = 50,000/(1 - 8) = 5,000
5. A firm's degree of total leverage (DTL) is equal to its degree of operating leverage
(DOL) ________.
A. plus its degree of financial leverage (DFL)
B. minus its DFL
C. divided by its DFL
* D. multiplied by its DFL
6. Solar Wind Manufacturing has fixed costs of $600,000 directly attributable to producing
a particular product. The product sells for $2,000 a unit and variable costs are $1,200.
Solar is financed with $8 million of common equity financing and $2 million of long-
term debt at 6% before taxes. Solar sold 1,000 units last year and expects volume to
increase by 100%, what is the Degree of Operating Leverage (DOL) at 1,000 units?
A. 1.67
* B. 4.00
C. 2.50
D. 10.00
7. Solar Wind Manufacturing has fixed costs of $600,000 directly attributable to producing
a particular product. The product sells for $2,000 a unit and variable costs are $1,200.
Solar is financed with $8 million of common equity financing and $2 million of long-
term debt at 6% before taxes. Solar sold 1,000 units last year and expects volume to
increase by 100%, what is the Degree of Financial Leverage (DFL) at 1,000 units?
A. 1.67
B. 4.00
* C. 2.50
D. 10.00
8. Solar Wind Manufacturing has fixed costs of $600,000 directly attributable to producing
a particular product. The product sells for $2,000 a unit and variable costs are $1,200.
Solar is financed with $8 million of common equity financing and $2 million of long-
term debt at 6% before taxes. Solar sold 1,000 units last year and expects volume to
increase by 100%, what is the Degree of Total Leverage (DTL) at 1,000 units?
A. 1.67
B. 4.00
C. 2.50
* D. 10.00
Chapter 17
1. The lower a firm's cost of capital, the lower the total valuation of the firm.
True?
* False?
2. Under the traditional approach to valuation and capital structure, the weighted
average cost of capital at first declines with moderate use of leverage, then increases.
* True?
False?
3. The traditional approach to capital structure theory implies that the value of the firm
is independent of its capital structure.
True?
* False?
4. Agency costs are defined as the costs of monitoring management so that it and the
firm behave in ways consistent with contractual agreements with stockholders and
lenders.
* True?
False?
5. A firm has net operating income of $1 million, an overall capitalization rate of 15%,
and $1 million of 10% debt. The total market value of the stock, using the net
operating income method approach, is ________.
A. $6,666,000
B. $7,667,000
* C. $5,667,000
D. $4,667,000
(NOI/k) – D = (1,000,000/0.15) – 1,000,000 = $5,667,000
6. Two firms are virtually identical except for their capital structure, but they are selling
at different values. According to M&M's original position ________.
A. one will be at greater risk of bankruptcy
B. the firm with greater financial leverage will have the higher value
C. this proves that markets cannot be efficient
* D. this will not continue because arbitrage will eventually cause the firms to sell at the
same value.