TEST 2s - 2021 - MAC 2021

10/27/21, 8:27 AM TEST 2s - 2021: Attempt review
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TEST 2s - 2021
Started on Tuesday, 26 October 2021, 6:01 PM

State Finished
Completed on Tuesday, 26 October 2021, 8:30 PM
Time taken 2 hours 29 mins
Marks 32.00/60.00
Grade 53.33 out of 100.00
Question 1
Incorrect
Mark 0.00 out of 2.00
A company has total costs of N$100 000, of which 40% is variable costs.
What is the operating leverage?
Answer: 1.6 
Operating leverage = fixed costs divided by variable costs.
If 40% of N$100 000 are variable costs, the remaining N$60 000 must be fixed costs.
Thus, N$60 000/N$40 000=1.5
The correct answer is: 1.5
Question 2
Correct
Lower financial leverage is related to the use of additional __________.
a. debt financing
b. common equity financing 
c. fixed costs
d. variable costs
The correct answer is: common equity financing
https://elearning.nust.na/elearn/mod/quiz/review.php?attempt=1413562&cmid=321137 1/17
Question 3
Correct
The firm has N$1 000 000 in fixed costs. The firm anticipates selling each unit for N$25 with variable costs of N$5 per
unit. Calculate the degree of operating leverage (DOL) to 2 decimal places at 400 000 units of quantity sold.
Answer: 1.14 
DOL = (S - VC)/(S - VC - FC)
= (N$10M - N$2M)/(N$10M - N$2M - N$1M)
= 1.14
Question 4
Correct
Konica Minolta (KM) has no debt outstanding and a total market value of N$150 000. Earnings before interest and taxes (EBIT)
are projected to be N$14 000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be
30% higher. If there is a recession, then EBIT will be 60% lower. KM is considering a N$60 000 debt issue with a 5% interest
rate. The proceeds will be used to repurchase shares of stock. There are currently 2 500 shares outstanding. Ignore taxes and
assume there is no debt outstanding.
Calculate earnings per share [EPS] to 2 decimal places under normal economic conditions
Answer: 5.6 
EPS = EBIT/shares outstanding
= N$14 000/2 500
= N$5.60
Question 5
Correct
Higher operating leverage is related to the use of additional __________.
a. fixed costs 
b. debt financing
c. common equity financing
d. variable costs
The correct answer is: fixed costs
Question 6
Correct
__________ is concerned with the acquisition, financing, and management of
assets with some overall goal in mind.
a. Agency Theory
b. Profit Maximization
c. Financial Management 
d. Social Responsibility.
The correct answer is: Financial Management
Question 7
Correct
Marigold group of hotels has a debt-equity ratio of 1.5. Marigold’s WACC and the cost of debt is 12%. The corporate tax rate is
35%.
What is Marigold’s cost of equity capital to 3 decimal places?
Answer: 0.183 
WACC = [0.6 x 0.12 (1 - 0.35)] + 0.4Ke
0.12 = 0.072 (1 - 0.35) + 0.4Ke
0.12 = 0.072 (0.65) + 0.4Ke
0.12 = 0.0468 + 0.4Ke
0.0732/0.4 = Ke; Ke = 0.1830 or 18.3%
Question 8
Incorrect
The firm has N$3 000 000 in debt that costs 10% annually. The firm also has a 9%, N$1 000 000 preferred stock issue
outstanding. The firm pays 40% in taxes. Calculate the degree of financial leverage (DFL) to 2 decimal places for the firm when its
EBIT is N$2 000 000.
Answer: 6.67 
DFL = N$2 000 000/(N$2 000 000 - N$300 000 - N$90 000/0.6)
= N$2 000 000/($2 000 000 - N$300 000 - N$150 000)
= N$2 000 000/N$1 550 000
= 1.29
Question 9
Correct
Afrox has equity with a market value of N$20 million and debt with a market value of N$10 million. Treasury bills that mature in
one year yield 8% per year, and the expected return on the market portfolio over the next year is 18%. The beta of Afrox’s equity
is 0.90. The firm pays no taxes.
What is Afrox’s cost of equity to 2 decimal places?
Answer: 0.17 
Ke = Rf + β [Rm - Rf]
= 0.08 + 0.90 [0.18 - 0.08]
= 0.17 or 17%
Question 10
Correct
Dividends are:
a. paid to lenders
b. not paid to ordinary shareholders
c. not allowable for corporation tax 
d. not paid to preference shareholders
The correct answer is: not allowable for corporation tax
Question 11
Correct
Each of the following items is included when computing a firm's target cash conversion cycle, except the:
a. Days of payables outstanding

b. Days in inventory
c. Cash discount period 
The correct answer is: Cash discount period
Question 12
Correct
Debenture:
a. does not require security

b. receives dividend payments
c. is a short-term loan
d. is a long-term loan 
The correct answer is: is a long-term loan
Question 13
Correct
Given the following information: The firm has N$1 000 000 in fixed costs. The firm produces only one product and anticipates
selling each unit for N$25 with variable costs of N$5 per unit
Calculate the break-even (quantity) point
Answer: 50000 
The break-even point = N$1 000 000/(N$25 - N$5)
= 50 000 units.
The correct answer is: 50000
Question 14
Correct
What is Afrox’s weighted average cost of capital to 2 decimal places?
Answer: 0.14 
Remember that one of the MM assumptions is that the firm’s debt is risk-free, so we can use the Treasury bill rate as the
cost of debt for the company. In the absence of taxes, a firm’s weighted average cost of capital is equal to:
WAAC = [D/(D+E)]Kd + [E/(D + E)]Ke
WAAC = [N$10 million/N$30 million](0.08) + [N$20 million/N$30 million](0.17)
WAAC = 0.14 or 14%
Question 15
Correct
Internal sources of finance do not include:
a. trade credit
b. retained earnings
c. better management of working capital
d. ordinary shares 
The correct answer is: ordinary shares
Question 16
Correct
At what annual interest rate to 4 decimal places must N$137 000 be invested so that it will grow to be N$475 000 in 14 years?

Answer: 0.0929 
475 000 = 137 000(1+r)14
(1+r)^14 = 475 000/137 000
r = 1.0929 – 1
r = 0.0929 or 9.29%
Question 17
Correct
Calculate earnings per share [EPS] to 2 decimal places under expansionary times
Answer: 7.28 
EPS = [EBIT x 1.60]/shares outstanding
= N$14 000(1.3)/2 500

= N$18 200/2 500
= N$7.28
Question 18
Correct
35%.
What is the weight of debt source of financing?
Answer: 0.6 
D/E = 1.5; D = 1.5E, so D/[D+E]
= 1.5E/[1.5E + E]
= 1.5/2.5
= 0.6 or 60%
Question 19
Correct
Which of the following is not a valid reason for a business to hold cash and marketable securities?
a. Satisfy compensating balance requirements
b. Maintain adequate cash needed for transactions
c. Maintain a precautionary balance
d. Earn maximum returns on investment assets 
The correct answer is: Earn maximum returns on investment assets
Question 20
Correct
Calculate earnings per share [EPS] to 2 decimal places under recession
Answer: 2.24 
EPS = [EBIT x (1- 0.60)]/shares outstanding
= N$14 000(0.40)/2 500
= N$5 600/2 500
= N$2.24
Question 21
Correct
What is Afrox’s debt to equity ratio to 2 decimal places?
Answer: 0.50 
Debt/Equity = MVD/MVE
= N$10 million/N$20 million
= 0.50
Question 22
Not answered
Marked out of 1.00
What is the most appropriate goal of the firm?
a. Stakeholder maximization.
b. Profit maximization.
c. EPS maximization.
d. Shareholder wealth maximization.
The correct answer is: Shareholder wealth maximization.
Question 23
Not answered
Marked out of 2.00
35%.
What is the weight of equity source of financing?
Answer: 
E/[D+E]
= 1 - 0.60
= 0.4 or 40%
Question 24
Not answered
Marked out of 1.00
The cash conversion cycle is the length of time from an initial expenditure for production to the date:
a. Cash is collected from customers offset by the length of time it takes to pay vendors
b. Cash is recorded on the books
c. Cash is paid to employees for production
d. Cash is collected from suppliers
The correct answer is: Cash is collected from customers offset by the length of time it takes to pay vendors
Question 25
Not answered
Marked out of 1.00
An increase in sales collections resulting from an increased cash discount for prompt payment would be expected to cause a:
a. Decrease in the cash conversion cycle

b. Increase in the operating cycle
c. Increase in bad debt issues
d. Increase in the average collection period
The correct answer is: Decrease in the cash conversion cycle
Question 26
Not answered
Marked out of 1.00
__________ is concerned with the maximization of a firm's earnings after taxes.
a. Shareholder wealth maximization
b. Stakeholder maximization
c. Profit maximization
d. EPS maximization
The correct answer is: Profit maximization
Question 27
Not answered
Marked out of 1.00
Which of the following is not a method of issuing ordinary shares:
a. auction
b. issue by tender
c. placing
d. intermediary offer
The correct answer is: auction
Question 28
Not answered
Marked out of 2.00
Given the following information: The firm has N$1 000 000 in fixed costs. The firm anticipates that variable costs will be N$1 for
every N$5 in sales.
Calculate the break-even point for sales revenues
Answer: 
The break-even point = N$1 000 000/[1 - (N$1/ N$5)]
= N$1 250 000
Question 29
Not answered
Marked out of 1.00
In the context of operating leverage break-even analysis, if selling price per unit falls and all other variables remain constant, the
operating break-even point in units will __________.
a. none of these
b. rise
c. stay the same
d. fall
The correct answer is: rise
Question 30
Not answered
Marked out of 1.00
Preference shares:
a. have no voting rights

b. receive dividends
c. are not allowable for corporation tax
The correct answer is: have no voting rights
Question 31
Not answered
Marked out of 2.00
How many years to the nearest whole number will it take for N$197 000 to grow to be N$554 000 if it is invested in an account
with a quoted annual interest rate of 8% with monthly compounding of interest?
Answer: 
FV = PV0 (1+r/m) mn
554 000 = 197 000(1+0.0067)12n
n12log1.0067 = log2.8122
n = log2.8122/12log1.0067
n = 12.97 = 13 years
Question 32
Not answered
Marked out of 4.00
Your family is about to take out a 30-year fixed-rate mortgage. The terms of the loan specify an initial principal balance (the
amount borrowed) of N$200 000 and an effective annual rate (EAR) of 6.75 percent. Payments will be made monthly. Determine
monthly payment to the nearest dollar
Answer: 
PV = N$200 000
r = 0.5625% (6.75/12)
n = 360 (30 years x 12)
Using the amortization PMT formula
PMT = 1 297.20 = 1 297
Question 33
Not answered
Marked out of 1.00
External sources of finance do not include:
a. debentures
b. leasing
c. retained earnings
d. overdrafts
The correct answer is: retained earnings
Question 34
Not answered
Marked out of 1.00
Consider a firm that has a DOL of 3.5 at Q units. What does this tell us about the firm?
a. If EBIT rises by 1% at the firm, then EPS will rise by 3.5%.

b. If EBIT rises by 3.5% at the firm, then EPS will rise by 1%.
c. If sales rise by 1% at the firm, then EBIT will rise by 3.5%.
d. If sales rise by 3.5% at the firm, then EBIT will rise by 1%.
The correct answer is: If sales rise by 1% at the firm, then EBIT will rise by 3.5%.
Question 35
Not answered
Marked out of 1.00
Which of the following costs would be considered a fixed cost?
a. Production labour
b. Bad-debt losses.
c. Raw materials.
d. Depreciation.
The correct answer is: Depreciation.
Question 36
Not answered
Marked out of 1.00
The decision involves determining the appropriate make-up of the right-hand side of the balance sheet.
a. Investment
b. Capital budgeting
c. Financing
d. Asset management
The correct answer is: Financing
Question 37
Not answered
Marked out of 1.00
Consider a firm that has a DFL of 3.5 at X dollars. What does this tell us about the firm?
a. If EBIT rises by 3.5% at the firm, then EPS will rise by 1%.
b. If sales rise by 3.5% at the firm, then EBIT will rise by 1%.
c. If EBIT rises by 1% at the firm, then EPS will rise by 3.5%.
d. If sales rise by 1% at the firm, then EBIT will rise by 3.5%.
The correct answer is: If EBIT rises by 1% at the firm, then EPS will rise by 3.5%.
Question 38
Not answered
Marked out of 2.00
Calculate the degree of total leverage (DTL) to 2 decimal places for a firm that has N$10 million in sales. The firm has EBIT of
N$2 000 000 after accounting for N$1 000 000 in fixed costs. The firm has N$3 000 000 in debt that costs 10% annually. The firm
also has a 9%, N$1 000 000 preferred stock issue outstanding. The firm pays 40% in taxes.
Answer: 
DTL = (N$2 million + N$1 million) / (N$2 million - N$300 000 - N$90 000/0.6)
= N$3 000 000 / (N$2 000 000 - N$300 000 - N$150 000)
= N$3 000 000 / N$1 550 000
= 1.94
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10/27/21, 8:27 AM TEST 2s - 2021: Attempt review

Started on Tuesday, 26 October 2021, 6:01 PM

Mark 0.00 out of 2.00

What is the operating leverage?

Operating leverage = fixed costs divided by variable costs.

The correct answer is: 1.5

Mark 1.00 out of 1.00

Lower financial leverage is related to the use of additional __________.

The correct answer is: common equity financing

Mark 2.00 out of 2.00

DOL = (S - VC)/(S - VC - FC)

= (N$10M - N$2M)/(N$10M - N$2M - N$1M)

Mark 2.00 out of 2.00

EPS = EBIT/shares outstanding

= N$14 000/2 500

The correct answer is: 5.6

Mark 1.00 out of 1.00

Higher operating leverage is related to the use of additional __________.

The correct answer is: fixed costs

Mark 1.00 out of 1.00

__________ is concerned with the acquisition, financing, and management of

assets with some overall goal in mind.

The correct answer is: Financial Management

Mark 4.00 out of 4.00

What is Marigold’s cost of equity capital to 3 decimal places?

WACC = [0.6 x 0.12 (1 - 0.35)] + 0.4Ke

0.12 = 0.072 (1 - 0.35) + 0.4Ke

0.12 = 0.072 (0.65) + 0.4Ke

0.12 = 0.0468 + 0.4Ke

0.0732/0.4 = Ke; Ke = 0.1830 or 18.3%

The correct answer is: 0.183

Mark 0.00 out of 2.00

= N$2 000 000/N$1 550 000

The correct answer is: 1.29

Mark 2.00 out of 2.00

What is Afrox’s cost of equity to 2 decimal places?

= 0.08 + 0.90 [0.18 - 0.08]

The correct answer is: 0.17

Mark 1.00 out of 1.00

The correct answer is: not allowable for corporation tax

Mark 1.00 out of 1.00

a. Days of payables outstanding

The correct answer is: Cash discount period

Mark 1.00 out of 1.00

a. does not require security

The correct answer is: is a long-term loan

Mark 2.00 out of 2.00

Calculate the break-even (quantity) point

The break-even point = N$1 000 000/(N$25 - N$5)

The correct answer is: 50000

Mark 2.00 out of 2.00

WAAC = [D/(D+E)]Kd + [E/(D + E)]Ke

WAAC = [N$10 million/N$30 million](0.08) + [N$20 million/N$30 million](0.17)

WAAC = 0.14 or 14%

The correct answer is: 0.14

Mark 1.00 out of 1.00

Internal sources of finance do not include:

The correct answer is: ordinary shares

Mark 2.00 out of 2.00

(1+r)^14 = 475 000/137 000

The correct answer is: 0.0929

Mark 2.00 out of 2.00

Calculate earnings per share [EPS] to 2 decimal places under expansionary times