. (TCO 4) Which of the following is true regarding the evaluation of projects? (Points: 4) sunk costs should be included erosion effects should not be considered financing costs need to be included opportunity costs are relevant 2. (TCO 4) There are several disadvantages to the payback method, among them: (Points: 4) payback ignores cash flows beyond the cutoff. payback can be used in conjunction with time adjusted methods of evaluation. payback is easy to use and to understand. none of the above is a disadvantage. 3. (TCO 3 and 4) You can ensure that an investment is expected to create value for (Points: 4) have a PI equal to zero. produce negative rates of return. have positive AARs. have positive IRRs. have positive NPVs. 4. (TCO 3 and 4) What is the net present value of a project with the following cash flows, if the discount rate is 10 percent? (Points: 4) $1,085.25 $1,193.77 $3,498.28 $4,102.86 $4,513.15 5. (TCO 4) The Inventive Co. is considering a new project. This project requires an initial cash investment of $70,000. The project will generate cash inflows of $10,500 in the first year. Then, the project will do nothing for two years, after which time cash inflows of $25,000 will be generated for four years. How long will it take the Inventive Co. to recover its $70,000 investment? (Points: 4) 5.16 years 5.38 years 6.11 years 6.62 years 6.94 years 6. (TCO 4) The postponement of a project until conditions are more favorable: (Points: 4) is a valuable option. is referred to as the option to extend. could not cause a negative net present value project to become a positive net present value project. will generally cause the internal rate of return for a project to decline. 7. (TCO 4) The situation that exists when the units within a business are allotted a fixed amount of money for capital budgeting, is referred to as: (Points: 4) soft rationing. hard rationing. unit capital rationing. allocated planning. strategic planning. 8. (TCO 3 and 4) ABC Cameras is considering an investment that will have a cost of $10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is 10%. Which of the following is true regarding this investment? (Points: 4) The net present value of the project is $11,000 This project should be accepted because it has a negative net present value This project should be accepted because it has a payback higher than 3 years The net present value of the project is close to $1,000 9. (TCO 4) Assume Company X plans to invest $60,000 in new computers. Using Tables 9.6 and 9.7 of your textbook (Page 277), which is the first year depreciation amount under MACRS? (Points: 4) $12,000 $8,575 $19,800 None of the above 10. (TCO 1 and 4) Assume a project has earnings before depreciation and taxes of $120,000, depreciation of $40,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project? (Points: 4) $56,000 $96,000 a loss of $21,000 none of these 11. (TCO 8) Which of the following factors will affect the expected rate of return on a security? (Points: 4) multiple states of the economy probability of occurrence for any one economic state market rate of return given a particular economic state all of the above will affect the expected rate of return 12. (TCO 8) Which statement is true regarding risk? (Points: 4) the expected return is usually the same as the actual return a key to assess risk is determining how much risk an investment adds to a portfolio risks can always be decreased or mitigated by the financial manager the higher the risk, the lower the return investors require for the investment 13. (TCO 8) The stock of Chocolate Galore is expected to produce the following returns, given the various states of the economy. What is the expected return on this stock? (Points: 4) 7.33 percent 9.82 percent 11.26 percent 11.33 percent 11.50 percent 14. (TCO 8) You own a portfolio that consists of $8,000 in stock A, $4,600 in stock B, $13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of stock D? (Points: 4) 17.68 percent 17.91 percent 18.42 percent 19.07 percent 19.46 percent 15. (TCO 8) You would like to create a portfolio that is equally invested in a risk-free asset and two stocks. The one stock has a beta of .80. What does the beta of the second stock have to be if you want the portfolio risk to equal that of the overall market? (Points: 4) 1.4 1.6 1.8 2.0 2.2 page#2 1. (TCO 8) Weak form market efficiency states that the value of a security is based on: (Points: 4) all public and private information. historical information only. all publicly available information. all publicly available information, plus any data that can be gathered from insider trading. random information with no clear distinction as to the source of that information. 2. (TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financed with debt at a cost of 6 percent (after-tax) and common equity at a cost of 18 percent. Assume debt and common equity each represent 50 percent of the firm’s capital structure. What is the weighted average cost of capital? (Points: 4) between 3 and 9% exactly 12% more than 14% exactly 11% none of the above 3. (TCO 5, 6 and 7) An issue of common stock is expected to pay a dividend of $4.80 at the end of the year. Its growth rate is equal to eight percent. If the required rate of return is 13 percent, what is its current price? (Points: 4) $103.68 $36.92 $96.00 none of these 4. (TCO 5, 6 and 7) Which of the following is true regarding the cost of debt? (Points: 4) It is the same as cost of equity. It is the interest rate that the firm pays on current/existing borrowing. An appropriate method to compute the cost of debt is using the YTM of current bonds outstanding. All of the above are true. 5. (TCO 5) Retained earnings has a cost associated with it because: (Points: 4) new funds must be raised. there is an opportunity cost associated with stockholder funds. Ke> g flotation costs increase the cost of funding. 6. (TCO 4) A project has the following cash flows. What is the internal rate of return? (Points: 4) less than 10% approximately 14% more than 16% more than 18% but less than 20% 7. (TCO 5, 6 and 7) Which one of the following is a correct statement? (Points: 4) Current tax laws favor debt financing. A decrease in the dividend growth rate increases the cost of equity. An increase in the systematic risk of a firm will decrease the firm’s cost of capital. A decrease in a firm’s debt-equity ratio will usually decrease the firm’s cost of capital. The cost of preferred stock decreases when the tax rate increases. 8. (TCO 5, 6 and 7) The six percent preferred stock of FKH Manufacturing is selling for $62 a share. What is the firm’s cost of preferred stock, if the tax rate is 34 percent and the par value per share is $100? (Points: 4) 5.98% 7.06% 8.05% 9.68% 10.10% 9. (TCO 2) The bankruptcy process has been utilized by firms as a means of: (Points: 4) renegotiating labor contracts. reducing labor costs. avoiding payment of a legal judgment. improving the firm’s competitive position. all of the above 10. (TCO 5) Which of the following statements is true regarding the cost of capital? (Points: 4) The cost of capital should not consider any flotation costs. All other being equal, it is preferable to use book value weights than market value weights. The WACC is the most appropriate discount rate for all projects. Depends primarily on the use of the funds, not the source. 11. (TCO 2) Select any actions that do not affect the cash account. (Points: 4) Goods are sold cash An interest payment on a notes payable is made A payment due is received from a client Dividends are paid to shareholders Inventory is purchased and paid for with credit 12. (TCO 2) Which of the following statements is true? (Points: 4) There is an opportunity cost associated with not offering credit. The costs of the credit application process and the costs expended in the collection process are not carrying costs of granting credit. Character, refers to the ability of a firm to meet its credit obligations out its operating cash flows. The optimal credit policy, is the policy that produces the largest amount of sales for a firm. 13. (TCO 2) Which one of the following credit terms is most apt to produce the shortest accounts receivable period? (Points: 4) net 25 net 10 1/10, net 30 3/10, net 15 2/20, net 45 14. (TCO 2) The Yellow Box has the following estimated quarterly sales for next year. The accounts receivable period is 45 days. What is the expected accounts receivable balance at the end of the third quarter? Assume each month has 30 days. (Points: 4) $600 $750 $900 $1,050 $1,200 15. (TCO 1) Why is maximization of the current value per share a more appropriate financial management goal than profit maximization? (Points: 4) Because by maximizing the current stock value, you also maximize the company’s profit for the year. Because this criterion is non-ambiguous. Because financial managers always act in the best interest of shareholders. Because it creates short-term gains in the financial statements. page#3 1. (TCO 1) Which one of the following activities best exemplify working capital management? (Points: 4) Sale long-term bonds to raise funds for a new machine. Determine the return of a potential project. Calculate the cash flows for a project. Manage payments to suppliers. 2. (TCO 1) Market values reflect which of the following: (Points: 4) The amount someone is willing to pay today for an asset. The value of the asset based on generally-accepted accounting principles. The asset’s historical cost. A and B only None of the above 3. (TCO 1) Use the following tax table to answer this question: John has taxable income of $389,745. What is John’s average tax rate? (Points: 4) 33% 34% 36% 37% 38% 4. (TCO 3) Regional Bank offers you an APR of 19 percent compounded semiannually, and Local Bank offers you an EAR of 19.50 percent for a new automobile loan. You should choose ______________ because its _______ is lower. (Points: 4) Regional Bank, APR Local Bank, EAR Regional Bank, EAR Local Bank, APR 5. (TCO 3) You deposited $8,000 in your bank account today. Which of the following will increase the future value of your deposit, assuming that all interest is reinvested? Assume the interest rate is a positive value. Select all that apply: (Points: 4) a decrease in the interest rate increasing the initial amount of your deposit decreasing the frequency of the interest payments extending the length of the investment period 6. (TCO 3) You want to have $15,000 for a down payment on a house five years from now. If you can earn 13 percent, compounded annually, on your savings, how much do you need to deposit today to reach your goal? (Points: 4) $7,858.11 $8,141.40 $9,803.58 $12,464.28 $14,213.25 7. (TCO 3) The new home that you want to buy costs $249,500. You plan to make a cash down payment of 20 percent and finance the balance over 10 years at 6.75 percent. What will be the amount of your monthly mortgage payment? (Points: 4) $2,291.89 $2,809.10 $3,287.46 $3,412.67 $4,145.68 8. (TCO 3) Which type of loan is comparable to the present value of a future lump sum? (Points: 4) effective annual rate amortized interest-only annual percentage pure discount 9. (TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest. The bonds mature in 25 years. What is the current price of the bond, if the YTM is 11 percent? Assume annual payments. (Points: 4) $1080 $1085 $925 $1000 10. (TCO 6) The market where one shareholder sells shares to another shareholder is called the _____ market. (Points: 4) primary main secondary principal dealer 11. (TCO 7) A taxpaying, levered firm’s optimal capital structure: (Points: 4) is 100 percent equity financing. consists of equal amounts of debt and equity financing. is the mixture of debt and equity financing that minimizes the firm’s aftertax cost of debt. is the mixture of debt and equity financing that minimizes the weighted average cost of capital. is 100 percent debt financing. 12. (TCO 3) SmithKline Company’s bonds are currently selling for $1,157.75 per $1000 par-value bond. The bonds have a 10 percent coupon rate and will mature in 10 years. What is the approximate yield to maturity? (Points: 4) 6.96% 7.69% 11.0% 12.1% 13. (TCO 8) Which of the following is true regarding bonds? (Points: 4) Bonds do not carry default risk. Bonds are sensitive to changes in the interest rates. Moody’s and Standard and Poor’s provide information regarding a bond’s interest rate risk. Municipal bonds are free of default risk. None of the above is true 14. (TCO 8) Two years ago, Maple Enterprises issued six percent, 20-year bonds and Temple Corp issued six percent, 10-year bonds. Since their time of issue, interest rates have increased. Which of the following statements is true of each firm’s bond prices in the market, assuming they have equal risk? (Points: 4) Maple’s decreased more than Temple’s Temple’s decreased more than Maple’s Maple’s increased more than Temple’s They are both priced the same 15. (TCO 6) A call provision in a bond agreement grants the issuer the right to: (Points: 4) repurchase the bonds prior to maturity at a pre-specified price. replace the bonds with equity securities. repurchase the bonds after maturity at a pre-specified price. change the coupon rate, provided the bondholders are notified in advance. buy back the bonds on the open market prior to maturity" ,
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