Reference no: EM13950146
Question 1. Which of the following capital budgeting techniques ignores the time value of money?
payback period approach
net present value
internal rate of return
profitability index
Question 2. The ________ is the rate of return that a firm must earn on its investments in order to maintain the market value of its stock.
yield to maturity
cost of capital
internal rate of return
modified internal rate of return
Question 3. The cost of common stock equity is ________.
the cost of the guaranteed stated dividend expected by the stockholders
the rate at which investors discount the expected dividends of the firm to determine its share value
the after-tax cost of the interest obligations
the historical cost of floating the stock issue
Question 4. A firm has an average age of inventory of 90 days, an average collection period of 40 days, and an average payment period of 30 days. The firm's operating cycle is ________ days.
110
130
120
70
Question 5. Which of the following is true of current assets?
The time of conversion of current assets to more liquid form is relatively unpredictable.
They are used to fund long-term operations and pay long-term expenses.
They are more profitable because they add more value to the product than that provided by fixed assets.
They are sources of short-term financing for a firm
Question 6. At a firm's quarterly dividend meeting held April 9, the directors declared a $0.50 per share cash dividend for the holders of record on Monday, May 1. The firm's stock will sell ex dividends on ________.
April 28
May 5
April 29
April 27
Question 7. Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is ________.
new common stock, retained earnings, preferred stock, long-term debt
common stock, preferred stock, long-term debt, short-term debt
preferred stock, new common stocks, common stock, retained earnings
long-term debt, preferred stock, retained earnings, new common stock
Question 8. Cash flows that could be realized from the best alternative use of an owned asset are called ________.
incremental costs
lost resale opportunities
opportunity costs
sunk costs
Question 9. The clientele effect refers to ________.
the relevance of dividend policy on a firm's share value
a firm's ability to attract stockholders whose dividend preferences are similar to the firm's dividend policy
the informational content of dividends that helps in predicting the future earnings and growth of a firm
the "bird-in-the-hand" argument
Question 10. An increase in fixed operating costs will result in ________.
a decrease in the degree of operating leverage
an increase in the degree of operating leverage
a decrease in the degree of financial leverage
an increase in the degree of financial leverage
Question 11. A firm has an average age of inventory of 60 days, an average collection period of 45 days, and an average payment period of 30 days. The firm's cash conversion cycle is ________ days.
15
45
75
135
Question 12. What is the NPV for a project whose cost of capital is 15 percent and initial after-tax cost is $5,000,000 and 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?
$1,700,000
$371,764
-$137,053
-$4,862,947
Question 13. Breakeven analysis is used by a firm ________.
to determine the level of operations necessary to cover all fixed operating costs
to determine the least cost of producing goods and services
to evaluate the profitability associated with various levels of sales
to determine the demand of a product
Question 14.Cash outlays that had been previously made and have no effect on the cash flows relevant to a current decision are called ________.
incremental historical costs
incremental past expenses
opportunity costs foregone
sunk costs
Question 15. Which of the following is true of a dividend payout?
When a firm announces that it will increase its dividend, the share price usually decreases on that news.
Dividend payments send a positive signal to investors in the marketplace that management believes that the stock is overvalued.
When a firm pays out dividends the share price will fall.
Dividend payouts have no impact on the share price of a stock in an efficient market
Question 16. If a firm's fixed operating costs decrease, the firm's ________.
operating breakeven point will decrease
operating breakeven point will increase
sale price per unit will decrease
sale price per unit will increase
Question 17. ________ projects do not compete with each other; the acceptance of one ________ the others from consideration.
Capital; eliminates
Independent; does not eliminate
Mutually exclusive; eliminates
Replacement; eliminates
Question 18. Generally the least expensive source of long-term capital is ________.
retained earnings
preferred stock
long-term debt
common stock
Question 19. The book value of an asset is equal to the ________.
fair market value minus the accounting value
original purchase price plus annual depreciation expense
original purchase price minus accumulated depreciation
depreciated value plus recaptured depreciation
Question 20. Which of the following is true of leverage?
It refers to the effects that operating and financial fixed costs have on the returns that shareholders earn.
It is associated with risks which are out of the control of managers.
It includes the effect of operating fixed costs on the returns of shareholders and not the financial fixed costs.
It is used to evaluate the profitability associated with various levels of sales
Question 21. The tax treatment regarding the sale of existing assets that are sold for more than the original purchase price results in ________.
an ordinary tax benefit
no tax benefit or liability
a recaptured depreciation taxed as ordinary income
a capital gain tax liability
Question 22. The cost of common stock equity may be estimated by using the ________.
yield curve
capital asset pricing model
break-even analysis
DuPont analysis
Question 23. A firm with limited dollars available for capital expenditures is subject to ________.
capital dependency
capital gains
working capital constraints
capital rationing
Question 24. 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 ________.
12.4 percent
7.2 percent
12 percent
15 percent
Question 25. Which of the following is a fixed cost?
inventory
rent
delivery costs
direct labor
Question 26. ________ projects have the same function; the acceptance of one ________ the others from consideration.
Capital; eliminates
Independent; does not eliminate
Mutually exclusive; eliminates
Replacement; eliminates
Question 27. A firm has fixed operating costs of $525,000. The sales price per unit is $35 and its variable costs per unit is $22.50. The firm's operating breakeven point in units is ________.
23,330
32,000
42,000
52,000
Question 28. ________ is the potential use of fixed financial charges to magnify the effects of changes in earnings before interest and taxes on a firm's earnings per share.
Financial leverage
Operating leverage
Total leverage
Degree of operating leverage
Question 29. 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?
15.57%
0.00%
13.57%
12.25%
Question 30. What is the profitability index of a project that has an initial cash outflow of $600, an inflow of $250 for the next 3 years and a cost of capital of 10 percent?
0.66
2.036
1.036
2.739
Question 31. The payment of cash dividends to corporate stockholders is decided by the ________.
creditors
stockholders
SEC
board of directors
Question 32. ________ is the process of evaluating and selecting long-term investments that are consistent with a firm's goal of maximizing owners' wealth.
Recapitalizing assets
Capital budgeting
Ratio analysis
Securitization
Question 33. 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 ________.
5 percent
8 percent
10 percent
13 percent
Question 34. Which of the following would be used in the computation of an initial investment?
the annual after-tax inflow expected from the investment
the initial purchase price of the investment
the historic cost of the existing investment
the profits from the new investment
Question 35. According to the residual theory of dividends, if a firm's equity need exceeds the amount of retained earnings, the firm would ________.
borrow to pay the cash dividend
sell additional stock to pay the cash dividend
pay no cash dividends
pay less dividends
Question 36. Tangshan Mining has common stock at par of $200,000, paid-in capital in excess of par of $400,000, and retained earnings of $280,000. In states where the firm's legal capital is defined as the par value of common stock, the firm could pay out ________ in cash dividends without impairing its capital
$200,000
$680,000
$600,000
$880,000
Question 37. A tax adjustment must be made in determining the cost of ________.
long-term debt
common stock
preferred stock
retained earnings
Question 38. The change in net working capital when evaluating a capital budgeting decision is ________.
the change in fixed liabilities minus the change in fixed assets
the increase in current assets
the increase in current liabilities
the change in current assets minus the change in current liabilities
Question 39. The ________ is a weighted average of the cost of funds which reflects the interrelationship of financing decisions.
internal rate of return
sunk cost
cost of capital
risk-free rate
Question 40. 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 50% 15%
The weighted average cost of capital is ________.
6 percent
10.7 percent
11 percent
15 percent