1. Capital Structure Theory in general assumes that:<\/p>\n
A firm’s value is determined by capitalizing (discounting) the firm’s expected net income by the firm’s cost of equity.<\/p>\n
A firm’s cost of capital rises as a firm uses more financial leverage.<\/p>\n
A firm’s value is determined by discounting the firm’s expected cash flows by the WACC.<\/p>\n
A firm’s cash flows will grow indefinitely at a constant rate.<\/p>\n
2. Which of the following financial ratios is the best measure of the operating effectiveness of a firm’s management?<\/p>\n
Quick ratio<\/p>\n
Return on investment<\/p>\n
Current ratio<\/p>\n
Gross profit margin<\/p>\n
3. The Securities Investor Protection Corporation protects individuals from <\/p>\n
other investors who fail to make delivery<\/p>\n
fraud by corporations<\/p>\n
making poor investment decisions<\/p>\n
brokerage firm failures<\/p>\n
4. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October?<\/p>\n
$25,000<\/p>\n
$35,000<\/p>\n
$45,000<\/p>\n
$15,000<\/p>\n
5. Project Sigma requires an investment of $1 million and has a NPV of $10. Project Delta requires an investment of $500,000 and has a NPV of $150,000. The projects involve unrelated new product lines. What is your evaluation of these two projects?<\/p>\n
The company should look at other investment criteria, not just NPV.<\/p>\n
Only project Delta should be accepted. Alpha’s NPV is too low for the investment.<\/p>\n
Both projects should be accepted because they have positive NPV’s<\/p>\n
Neither project should be accepted because they might compete with one another<\/p>\n
6. Which of the following is not part of the underwriting process?<\/p>\n
the prospectus<\/p>\n
the Securities and Exchange Commission<\/p>\n
the syndicate<\/p>\n
the Federal Reserve<\/p>\n
7. When the impact of taxes is considered, as the firm takes on more debt<\/p>\n
the weighted average cost of capital will increase.<\/p>\n
there will be no change in total cash flows.<\/p>\n
both taxes and total cash flow to stockholders and bondholders will decrease.<\/p>\n
cash flows will increase because taxes will decrease.<\/p>\n
8. Metals Corp. has $2,575,000 of debt, $550,000 of preferred stock, and $18,125,000 of common equity. Metals Corp.’s after-tax cost of debt is 5.25%, preferred stock has a cost of 6.35%, and newly issued common stock has a cost of 14.05%. What is Metals Corp.’s weighted average cost of capital? <\/p>\n
12.78%<\/p>\n
8.32%<\/p>\n
6.56%<\/p>\n
10.84%<\/p>\n
9. Given an accounts receivable turnover of 8 and annual credit sales of $362,000, the average collection period (360-day year) is <\/p>\n
60 days.<\/p>\n
45 days.<\/p>\n
75 days<\/p>\n
90 days.<\/p>\n
10. Accounting break-even analysis solves for the level of sales that will result in:<\/p>\n
Free cash flow = $0.00.<\/p>\n
NPV = $0.00.<\/p>\n
of Capital.<\/p>\n
net income = $0.00.<\/p>\n
11. Buying and selling in more than one market to make a riskless profit is called: <\/p>\n
profit maximization.<\/p>\n
arbitrage.<\/p>\n
international trading.<\/p>\n
globalization<\/p>\n
12. Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects? <\/p>\n
Cash flows are more stable than accounting profits.<\/p>\n
Cash flows reflect the timing of benefits and costs more accurately than accounting profits.<\/p>\n
Cash flows have a greater present value than accounting profits.<\/p>\n
Cash flows improve the tax position of a firm more than accounting profits.<\/p>\n
13. Which of the following could offset the higher risk exposure a company would face if it\u2019s current ratio and net working capital were relatively low?<\/p>\n
It could buy back some of its shares in the open market in order to reduce its equity.<\/p>\n
Its current assets would need to be highly liquid.<\/p>\n
It could offer no discounts for early payment by its customers.<\/p>\n
Its accounts receivable collection policy could increase the average collection period.<\/p>\n
14. Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects?<\/p>\n
Cash flows are more stable than accounting profits.<\/p>\n
Cash flows have a greater present value than accounting profits.<\/p>\n
Cash flows reflect the timing of benefits and costs more accurately than accounting profits.\u00b7 <\/p>\n
Cash flows improve the tax position of a firm more than accounting profits.<\/p>\n
15. Compute the payback period for a project with the following cash flows, if the company’s discount rate is 12%.<\/p>\n
Initial outlay = $450<\/p>\n
Cash flows: Year 1 = $325<\/p>\n
Year 2 = $65<\/p>\n
Year 3 = $100<\/p>\n
3.43 years<\/p>\n
3.17 years<\/p>\n
2.88 years<\/p>\n
2.6 years<\/p>\n
16. The Oviedo Thespians are planning to present performances of their Florida Revue on 2 consecutive nights in January. It will cost them $5,000 per night for theater rental, event insurance and professional musicians. The theater will also take 10% of gross ticket sales. How many tickets must they sell at $10.00 per ticket to raise $1,000 for their organization?<\/p>\n
1000 tickets<\/p>\n
1,314 tickets<\/p>\n
1,223 tickets<\/p>\n
1,112 tickets<\/p>\n
17. Which of the following is true regarding Investment Banks?<\/p>\n
As a result of the financial crisis of 2008, all stand-alone Investment banks either failed, were merged into commercial banks, or became commercial banks.<\/p>\n
When Glass-Steagal was repealed in 1999, commercial banks and Investment banks had to be separate entities.<\/p>\n
As of 2010, stand alone Investment banks are numerous.<\/p>\n
Under the Glass-Steagal act, commercial banks were allowed to operate as Investment banks.<\/p>\n
18. If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should:<\/p>\n
maximize sales revenues<\/p>\n
increase the market value of the firm’s common stock.<\/p>\n
positively affect profits.<\/p>\n
either increase or have no effect on the value of the firm’s common stock.<\/p>\n
19. Which of the following is true about bonds? <\/p>\n
They are obligations from the investor to the corporation.<\/p>\n
They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year.<\/p>\n
At maturity of the bond, the investor receives the market price of the bond.<\/p>\n
Their interest rate always varies with the Consumer Price Index<\/p>\n
20. Which of the following is most likely to occur if a firm over-invests in net working capital? <\/p>\n
The current ratio will be lower than it should be.<\/p>\n
The return on investment will be lower than it should be.<\/p>\n
The quick ratio will be lower than it should be.<\/p>\n
The times interest earned ratio will be lower than it should be.<\/p>\n
21. Which of the following goals is in the best long-term interest of stockholders? <\/p>\n
Profit maximization<\/p>\n
Maximizing sales revenues<\/p>\n
Maximizing of the market value of the existing shareholders’ common stock<\/p>\n
Risk minimization<\/p>\n
22. Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2014; sales were $3,450,000 in fiscal 2013. Assume the following figures for the fiscal year ending 2013: cash $70,000; accounts receivable $250,000; inventory $400,000; net fixed assets $520,000; accounts payable $235,000; and accruals $155,000. Use the percent-of-sales method to forecast cash for the fiscal year ending 2014.<\/p>\n
$216,418<\/p>\n
$120,725<\/p>\n
$319,604<\/p>\n
$75,003<\/p>\n
23. Which of the following statements best represents what finance is about? <\/p>\n
Maximizing profits<\/p>\n
Creation and maintenance of economic wealth<\/p>\n
How political, social, and economic forces affect corporations<\/p>\n
Reducing risk <\/p>\n
24. If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of five years? <\/p>\n
$3,525.62<\/p>\n
$5,008.76<\/p>\n
$2,465.78<\/p>\n
$3,408.88<\/p>\n
25. Long-term financial plans typically encompass:<\/p>\n
5 to 10 years.<\/p>\n
about 5 years.<\/p>\n
6 to 12 months.<\/p>\n
the entire lifecycle of the corporation.<\/p>\n
26. When calculating the weighted average cost of capital, which of the following has to be adjusted for taxes?<\/p>\n
Common stock<\/p>\n
Retained earnings<\/p>\n
Preferred stock<\/p>\n
Debt<\/p>\n
27. We compute the profitability index of a capital-budgeting proposal by Initial outlay = $1,748.80<\/p>\n
dividing the present value of the annual after-tax cash flows by the cost of capital.<\/p>\n
multiplying the cash inflow by the IRR. <\/p>\n
multiplying the IRR by the cost of capital.<\/p>\n
dividing the present value of the annual after-tax cash flows by the cost of the project. <\/p>\n
28. You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years?<\/p>\n
$25,000<\/p>\n
$38,720<\/p>\n
$39,720<\/p>\n
$31,060<\/p>\n
29. Aspects of demand risk controllable by the firm include:<\/p>\n
interest rates.<\/p>\n
entry of external competitors.<\/p>\n
status of the regional and national economy.<\/p>\n
product quality.<\/p>\n
30. Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non-depreciation expenses by $3,000 annually. Due to the sales increase, Delta expects its working capital to increase $1,000 during the life of the project. Delta will depreciate the machine using the straight-line method over the project’s five year life to a salvage value of zero. The machine’s purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent. The machine’s initial cash outflow is:<\/p>\n
$21,000.<\/p>\n
$23,000.<\/p>\n
$27,000.<\/p>\n
$20,000.X<\/p>\n","protected":false},"excerpt":{"rendered":"
1. Capital Structure Theory in general assumes that: A firm’s value is determined by capitalizing (discounting) the firm’s expected net income by the firm’s cost of equity. A firm’s cost of capital rises as a firm uses more financial leverage. Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-28242","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/28242","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=28242"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/28242\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=28242"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=28242"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=28242"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}