Reference no: EM132788897

Questions -

Q1) Which of the following best describes the discount rate that when applied to the future cash flows makes them equal to the initial cash expenditures?

a) Payback Period

b) Internal Rate of Return

c) Net Present Value

d) Accounting Rate of Return

Q2) What is an advantage of the Pay Back Period method?

a) It considers all cash flows.

b) It considers the wealth of shareholders of the business.

c) It considers the hurdle rate.

d) It is very easy to use and simple to explain.

Q3) Which of the following is true regarding the Pay Back Period method?

a) It considers the time value of money

b) It considers a company's cost of capital

c) It evaluates the overall profitability of an investment

d) It only considers cash flow up to initial investment

Q4) Which of the following is an appropriate matching of sources of funds with uses of funds?

a) Financing an increase in accounts receivable with long term bond (loan)

b) Purchasing new equipment with a short term loan

c) Financing a plant expansion by selling accounts receivables (factoring)

d) Purchasing new equipment with a long term loan

Q5) Which form of long-term financing, if available, is usually used last?

a) Debt

b) Common shares

d) Preferred shares

d) Retained Earnings

Q6) Which of the following investments would investors generally view as the riskiness?

a) Bonds.

b) Mortgages.

c) Preferred shares.

d) Common shares.

Q7) What is a disadvantage to many small businesses in listing on the stock exchange?

a) Increased income taxes and capital gains tax rates on earnings.

b) Increased public scrutiny of its business and financial processes.

c) Increased interest rates on future loan financing

d) Decreased flexibility in financing future projects through informal sources of capital.

Q8) What is an advantage to a small business in listing on the stock exchange?

a) Increasing the competitive information that will be made available to it.

b) Being taken over by a larger business during a period of low sales and profits.

c) Immediate increase in Net Income from inflow of cash by selling common shares.

d) Raise of company's profile and thus improving its chances in attracting better strategic partnerships and financing opportunities.

Q9) Manchester Mechanical Ltd. paid a dividend this year of $6.30 on each of its 450,000 common shares outstanding. Current market price is $56.00. Dividends are expected to grow by 1.5% per year. What is the cost of share capital to the business?

a) 11.3%

b) 11.4%

c) 12.8%

d) $2.88 million

Q10) Darktree Inc. has $10 million of 10% bonds outstanding. The market value of bond is $9 million. Darktree's corporate tax rate is 15%. What is the cost of debt to Darktree?

a) 8.5%

b) 9.0%

c) 9.4%

d) 10.3%

Q11) Which financing source usually costs the most?

a) bonds

b) retained earnings

c) mortgage

d) common shares

Q12) What is the main role of a stock exchange?

a) To act as a primary capital market for businesses and government.

b) To act as a primary and secondary capital market for businesses.

c) To act as a primary capital market for businesses.

d) To act as a secondary capital market for businesses.

Q13) Which of the following is an internal source of long-term capital?

a) loans

b) retained Earnings

c) common shares

d) preferred shares

Q14) Which of the following is a disadvantage to a business of using debt to finance its capital projects?

a) Contributes to the dilution of management control.

b) Takes longer to acquire than equity financing.

c) By making the business riskier, contributes to a higher weighted average cost of capital.

d) Is more expensive than equity financing because of tax considerations.

Q15) What is an advantage to a business when financing by issuing of preferred shares instead of bonds?

a) Preferred shares trade on stock exchanges as well as OTC (over the counter) making preferred share issues always easier to place.

b) A company is legally obligated to pay interest to its bondholders. Dividends to preferred shareholders can be deferred indefinitely.

c) Preferred shareholders demand a lower rate of return than bondholders.

d) Dividends paid to preferred shareholders can be written off against taxes at a higher rate than interest payments to bond holders.