ACF103 2014 – Week 3 Quiz Solns
Chapter 11
1.
The largest single source of short-term financing for businesses collectively is
________.
A.
bank loans
B.
commercial paper
* C. trade credit
D.
trade acceptances
2.
If credit terms are 3/10, net 45, what is the approximate cost of foregoing the
cash discount and paying on the final due date? (Use a 365-day year and round
to nearest percent.)
A.
3%
B.
13%
C.
25%
* D. 32%
Answer = (3/97)[365/(45 - 35)] = 32.25%
3.
What is the approximate cost of not taking the cash discount and paying on the
final due date if credit terms are 1/10, net 30? (Use a 365-day year and round
to the nearest percent.)
A.
10%
* B. 18%
C.
22%
D.
30%
Answer = (1/99)/[365/(30 – 10)] = 18.43%
4.
Suppose a firm has a bimonthly payroll of $250,000 with an average amount
of accrued wages of $125,000. If the firm were to increase its pay period from
bimonthly to monthly, accrued wages would amount to ________.
A.
$500,000
B.
$375,000
* C. $250,000
D.
$125,000
5.
Suppose a firm establishes a $4 million revolving line of credit with its bank.
As part of its agreement, the firm will pay a commitment fee of 0.5% on the
unused portion of the line. If the average borrowing is $3 million over the
year, the commitment fee will be ________.
* A. $5,000
B.
$10,000
C.
$15,000
D.
$50,000
6.
When a firm factors its accounts receivable ________.
A.
collection costs increase
* B. it sells receivables to a financial institution
C.
it uses receivables as collateral against borrowing
D.
it gives up the ability to borrow from banks
Chapter 12
1.
The Pink Pussycat Lounge is considering replacing its lighting system. The
new lights will cost $16,000 and can be installed for $2,500. The old light
fixtures were depreciated to zero but can be sold to Secondhand Sam for
$1,000. If the Pink Pussycat has a 35% tax rate, the initial cash outflow for the
new lighting system is ________.
A.
$16,000
B.
$17,500
* C. $17,850
D.
$18,500
16,000 + 2,500 – (1,000 – 350(tax)) = 17,850
2.
* A.
B.
C.
D.
Project EXPAND will require $350,000 to replace some existing machinery.
Capitalized expenditures total $40,000. The after-tax salvage value of the 'old'
machinery will provide $90,000 to the firm. The new machine will require that
the firm purchase some additional inventory which will result in an increase in
net working capital of $50,000. What is the initial cash outflow?
$350,000
$300,000
$270,000
none of the above
350,000 + 40,000 – 90,000 + 50,000 = 350,000
3.
Project GROW will result in the following expected changes in the balance
sheet: (1) an increase in accounts receivable of $20,000, (2) an increase in
inventory of $20,000, and finally (3) an increase in accounts payable of
$15,000. What is the change in net working capital (NWC)?
A.
-$25,000
B.
-$15,000
C.
+$15,000
* D. +$25,000
+20,000 + 20,000 – 15,000 = +25,000
4.
A.
B.
C.
* D.
5.
In analyzing a long-term investment proposal, ________.
include sunk costs
include after-tax interest payments
include before-tax interest payments
include opportunity costs
The basic characteristics of relevant project flows include all of the following
except ________.
A.
after-tax flows
B.
cash flows
* C. financing flows
D.
incremental flows
Chapter 13.
1.
The payback period method is inferior to the net present value method because
it ________.
A.
deals with accounting income rather than cash flows
* B. fails to consider cash flows beyond the payback period
C.
assumes that cash flows are uniform over the life of the investment
D.
is difficult to compute
2.
The initial cost of a conventional project is $14,000. The present value of the
project's cash inflows, discounted at 12 percent, is $12,500. The internal rate
of return is ________.
A.
greater than 12 percent
B.
equal to 12 percent
* C. less than 12 percent
* D. cannot tell without additional information
3.
In capital budgeting, the hurdle rate is ________.
* A. the minimum rate of return acceptable to the firm
B.
the internal rate of return on a project
C.
essentially the same as the prime rate
D.
the present value of the expected future cash flows divided by the initial cash
outflow
4.
An investment proposal has an initial cash outlay of $100,000 and a net
present value of $50,000. The project's profitability index is ________.
A.
0.50
B.
2.00
C.
1.00
* D. 1.50
5.
The internal rate of return method of capital budgeting implicitly assumes that
the cash flows from a project can be reinvested at the ________.
A.
required rate of return
B.
Treasury bill rate
* C. project's internal rate of return
D.
risk-free rate
6.
A.
The profitability index is the
difference between the project's initial cash outflow and the present value of
the expected future cash flows.
B.
sum of the project's initial cash outflow and the present value of the future
expected cash flows.
C.
project's initial cash outflow divided by the present value of the expected
future cash flows.
* D. present value of the expected future cash flows divided by the project's initial
cash outflow.
Chapter 15
1.
The use of an overall cost of capital as the acceptance criterion for investment
decisions is appropriate only if the current projects of the firm are of similar
risk and investment proposals under consideration are of the same character.
* True?
False?
2.
According to the capital asset pricing model, the cost of equity is equal to a
risk-free rate plus the market risk premium adjusted by the appropriate beta.
* True?
False?
3.
Generally, a firm should try to maximize its overall cost of capital.
True?
* False?
4.
When calculating the overall cost of capital, component costs should be based
on the ________ costs of various sources of financing.
A.
historical
* B. marginal
C.
imbedded
D.
residual
5.
XXX's common stock currently sells for $60 a share. If a dividend of $3 a
share is expected in the coming year, the firm's marginal tax rate is 34%, and
if dividends are expected to grow at a 10% rate, the cost of equity is closest to
________.
A.
5%
B.
10%
* C. 15%
D.
18%
ke = (D1/P0) + g = (3/60) + 0.10
= 0.15 = 15%
6.
YYY's common stock is currently selling for $45 a share. Last year's dividend
was $2, the firm's marginal tax rate is 34%, and dividends are expected to
grow 5% annually. The cost of equity is ________.
* A. 9.7%
B.
2.2%
C.
9.4%
D.
8.7%
ke = (D0 (1 + g)/P0) + g = [2(1.05)/45] + 0.05 = 0.0967 = 9.7% (rounded)
7.
The beta coefficient for Field Flowers, Inc. (FFI) is 1.90. If the risk-free rate is
3.5% and the market risk premium is 6.0%, the required return for FFI
common stock is closest to ________.
A.
8.25%
B.
9.50%
C.
11.4%
* D. 14.9%
ri = rf + β(rm – rf) = 0.035 + 1.9(0.06) = 0.035 + 0.114 = 0.149 =14.9%
Chapter 16
1.
Any time a company has fixed operating costs, a change in the volume of sales can
result in a more than proportional change in operating profit or loss.
* True?
False?
2.
A break-even chart shows the relationship among total revenues, total operating
costs, and profits for various levels of production and sales.
* True?
False?
3.
"DOL at 2,500 units = 4" means that if sales decrease 3 percent to 2,425 units, EBIT
will decrease by 7 percent.
True?
* False?
4.
A company has fixed costs of $50,000 and variable costs per unit of output of $8. If its
sole product sells for $18, what is the break-even quantity of output?
A.
1,500
B.
2,500
C.
5,000
D.
7,500
QBE = FC/(P - V) = 50,000/(1 - 8) = 5,000
5.
A.
B.
C.
* D.
A firm's degree of total leverage (DTL) is equal to its degree of operating leverage
(DOL) ________.
plus its degree of financial leverage (DFL)
minus its DFL
divided by its DFL
multiplied by its DFL
6.
Solar Wind Manufacturing has fixed costs of $600,000 directly attributable to
producing a particular product. The product sells for $2,000 a unit and variable costs
are $1,200. Solar is financed with $8 million of common equity financing and $2
million of long-term debt at 6% before taxes. Solar sold 1,000 units last year and
expects volume to increase by 100%, what is the Degree of Operating Leverage (DOL)
at 1,000 units?
A.
* B.
C.
D.
1.67
4.00
2.50
10.00
7.
Solar Wind Manufacturing has fixed costs of $600,000 directly attributable to
producing a particular product. The product sells for $2,000 a unit and variable costs
are $1,200. Solar is financed with $8 million of common equity financing and $2
million of long-term debt at 6% before taxes. Solar sold 1,000 units last year and
expects volume to increase by 100%, what is the Degree of Financial Leverage (DFL)
at 1,000 units?
A.
B.
* C.
D.
1.67
4.00
2.50
10.00
8.
Solar Wind Manufacturing has fixed costs of $600,000 directly attributable to
producing a particular product. The product sells for $2,000 a unit and variable costs
are $1,200. Solar is financed with $8 million of common equity financing and $2
million of long-term debt at 6% before taxes. Solar sold 1,000 units last year and
expects volume to increase by 100%, what is the Degree of Total Leverage (DTL) at
1,000 units?
A.
B.
C.
* D.
1.67
4.00
2.50
10.00
Chapter 17
1.
The lower a firm's cost of capital, the lower the total valuation of the firm.
True?
* False?
2.
Under the traditional approach to valuation and capital structure, the weighted
average cost of capital at first declines with moderate use of leverage, then increases.
* True?
False?
3.
The traditional approach to capital structure theory implies that the value of the firm
is independent of its capital structure.
True?
* False?
4.
Agency costs are defined as the costs of monitoring management so that it and the
firm behave in ways consistent with contractual agreements with stockholders and
lenders.
* True?
False?
5.
A firm has net operating income of $1 million, an overall capitalization rate of 15%,
and $1 million of 10% debt. The total market value of the stock, using the net
operating income method approach, is ________.
A.
$6,666,000
B.
$7,667,000
* C.
$5,667,000
D.
$4,667,000
(NOI/k) – D = (1,000,000/0.15) – 1,000,000 = $5,667,000
6.
A.
B.
C.
* D.
Two firms are virtually identical except for their capital structure, but they are selling
at different values. According to M&M's original position ________.
one will be at greater risk of bankruptcy
the firm with greater financial leverage will have the higher value
this proves that markets cannot be efficient
this will not continue because arbitrage will eventually cause the firms to sell at the
same value.