1. (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
0
10000062
MultipleChoice
3
2. (TCO 4) There are several disadvantages to the payback method, among them: (Points :
4)
payback ignores the time value of money.
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.
0
10000063
MultipleChoice
6
3. (TCO 3 and 4) A net present value of zero implies that an investment: (Points : 4)
has no initial cost.
has an expected return that is less than the required return.
should be rejected even if the discount rate is lowered.
never pays back its initial cost.
is earning a return that exactly matches the requirement.
0
10000064
MultipleChoice
8
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?
Year
0
1
2
3
4
Cash
$9,000 $10,000 $15,200 $7,800
flow $32,000
(Points : 4)
$1,085.25
$1,193.77
$3,498.28
$4,102.86
$4,513.15
0
10000065
MultipleChoice
11
5. (TCO 4) Howard Company is considering a new project that will require an initial cash
investment of $575,000. The project will produce no cash flows for the first three years.
The projected cash flows for years 4 through 8 are $73,000, $112,000, $124,000,
$136,000, and $145,000, respectively. How long will it take the firm to recover its initial
investment in this project? (Points : 4)
5.81 years
6.05 years
6.96 years
7.90 years
This project never pays back
0
10000066
MultipleChoice
13
6. (TCO 4) Ignoring the option to expand: (Points : 4)
overestimates the internal rate of return on a project.
ignores the possibility that a negative net present value project might be positive,
given changes over time.
ignores the possibility that one variable is the primary source of the forecasting risk
associated with a project.
underestimates the net present value of a project.
0
10000067
MultipleChoice
18
7. (TCO 4) ___________, occurs when a firm cannot raise financing for a project under any
circumstances. (Points : 4)
contingency planning.
hard rationing.
soft rationing.
capital constraint.
scenario analysis.
0
10000068
MultipleChoice
21
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
0
10000069
MultipleChoice
24
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 second year depreciation amount under
MACRS? (Points : 4)
$12,000
$19,200
$19,800
None of the above
0
10000070
MultipleChoice
27
10. (TCO 1 and 4) Assume a corporation has earnings before depreciation, and taxes of
$100,000, depreciation of $40,000, and that it has a 30 percent tax bracket. What are the
after-tax cash flows for the company? (Points : 4)
$82,000
$110,000
$42,000
none of these
0
10000071
MultipleChoice
28
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
0
10000072
MultipleChoice
33
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
0
10000073
MultipleChoice
34
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?
State of
Economy
Probability of State of
Economy
Rate of
Return
Recession
.02
-.06
Normal
.88
.11
Boom
.10
.17
(Points : 4)
7.33 percent
9.82 percent
11.26 percent
11.33 percent
11.50 percent
0
10000074
MultipleChoice
38
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
0
10000075
MultipleChoice
40
15. (TCO 8) Stock A has an expected return of 14 percent and a beta of 1.3. Stock B has
an expected return of 10 percent and a beta of .9. Both stocks have the same reward-torisk ratio. What is the risk-free rate? (Points : 4)
1.0 percent
1.8 percent
2.3 percent
2.5 percent
3.1 percent
0
10000076
MultipleChoice
45
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.
0
10000077
MultipleChoice
3
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
0
10000078
MultipleChoice
4
3. (TCO 5, 6 and 7) An issue of common stock is selling for $57.20. The year end dividend
is expected to be $2.32, assuming a constant growth rate of six percent. What is the
required rate of return? (Points : 4)
10.3%
10.1%
4.1%
5.8%
0
10000079
MultipleChoice
7
4. (TCO 5, 6 and 7) Which of the following is true regarding the cost of debt? (Points : 4)
It is the return that the firm’s creditors demand on new borrowing.
It is always equal to the weighted cost of capital.
An appropriate method to compute the cost of debt is using the coupon rate of current bonds
outstanding.
All of the above are true.
0
10000080
MultipleChoice
11
5. (TCO 5) Which of the following is true regarding the cost of retained earnings? (Points : 4)
it is irrelevant to the WACC
requires new funds to be raised
need to be adjusted for the flotation costs
have a cost, which is the opportunity cost associated with stockholder funds
0
10000081
MultipleChoice
14
6. (TCO 4) A project has the following cash flows. What is the internal rate of return?
Year
0
1
2
3
Cash
$224,800 $224,800 $67,200
flow $443,600
(Points : 4)
less than 7%
between 8 and 11%
more than 13%
exactly 15%
0
10000082
MultipleChoice
17
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.
0
10000083
MultipleChoice
19
8. (TCO 5, 6 and 7) The preferred stock of Blue Sky Air pays an annual dividend of $7.25 a
share and sells for $54 a share. The tax rate is 35 percent. What is the firm's cost of
preferred stock? (Points : 4)
8.56 percent
9.32 percent
11.85 percent
13.43 percent
14.47 percent
0
10000084
MultipleChoice
24
9. (TCO 2) Which one of the following occurs if a firm files for Chapter 7 bankruptcy, but
does not generally occur if the firm files for Chapter 11 bankruptcy? (Points : 4)
a petition is filed in federal court
administrative fees are incurred
a list of creditors is compiled
pre-bankruptcy shareholders tend to lose part, if not all, of their investment in the
firm
a trustee-in-bankruptcy is elected by the creditors
0
10000085
MultipleChoice
27
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.
0
10000086
MultipleChoice
28
11. (TCO 2) Which of the following increases the cash account? (Points : 4)
Goods are sold on credit
An interest payment on a notes payable is made
A payment due is received from a client
Raw materials are purchased and paid for with credit
0
10000087
MultipleChoice
33
12. (TCO 2) Which of the following statements is true? (Points : 4)
The optimal credit policy minimizes the total cost of granting credit.
Firms should avoid offering credit at all cost.
An increase in a firm's average collection period generally indicates that an
increased number of customers are taking advantage of the cash discount.
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.
0
10000088
MultipleChoice
34
13. (TCO 2) All else constant, a decrease in the accounts receivable period will: (Points : 4)
lengthen the accounts payable period.
shorten the inventory period.
lengthen the operating cycle.
shorten the cash cycle.
shorten the accounts payable period.
0
10000089
MultipleChoice
38
14. (TCO 2) Highland, Inc. has the following estimated quarterly sales for next year. The
accounts receivable period is 30 days. How much does the firm expect to collect in the
fourth quarter? Assume that each month has 30 days.
Q1
Sales
$3,200
Q2
$4,500
Q3
$4,400
Q4
$2,900
(Points : 4)
$3,250
$3,400
$3,600
$3,750
$3,900
0
10000090
MultipleChoice
42
15. (TCO 1) Which one of the following actions best matches the primary goal of financial
management? (Points : 4)
increasing the net, working capital while lowering the long-term asset requirements
improving the operating efficiency, thereby increasing the market value of the stock
increasing the firm’s market share
reducing fixed costs and increasing variable costs
increasing the liquidity of the firm by transferring short-term debt into long-term
debt
0
10000091
MultipleChoice
44
1. (TCO 1) Which of the following are capital structure concerns?
I. how to obtain short-term financing
II. the company's financing mix
III. the cost of funds
IV. how and where to raise money (Points : 4)
I and II
I, II and III
II, III and IV
I, III and IV
All of the above
0
10000092
MultipleChoice
3
2. (TCO 1) Market value is important to the financial manager because: (Points : 4)
It reflects the value of the asset based on generally-accepted accounting principles.
Is a crucial component of the balance sheet, and can impact the financial
statements.
Market values reflect the amount someone is willing to pay today for an asset. The
market value of an asset reflects its historical cost.
0
10000093
MultipleChoice
6
3. (TCO 1) Use the following tax table to answer this question:
Taxable Income
Tax Rate
$0-
$50,000
15%
$50,001-
75,000
25
$75,001-
100,000
34
$100,001-
335,000
39
$335,001-
10,000,000
34
John has taxable income of $389,745. What is John’s average tax rate? (Points : 4)
33%
34%
36%
37%
38%
0
10000094
MultipleChoice
7
4. (TCO 3) Regional Bank offers you an APR of nine percent compounded quarterly, and
Local Bank offers you an EAR of 9.15 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
0
10000095
MultipleChoice
12
5. (TCO 3) You deposited $5,000 in your bank account today. An increase in 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)
interest rate
initial amount of your deposit
frequency of the interest payments
length of the investment period
0
10000096
ManyMultipleChoi
3
6. (TCO 3) Thirteen years from now, you will be inheriting $30,000. What is this inheritance
worth to you today, if you can earn four percent interest compounded annually? (Points : 4)
$18,017.22
$20,741.87
$23,190.98
$26,359.88
$28,846.15
0
10000097
MultipleChoice
13
7. (TCO 3) Paper Pro needed a new store. The company spent $65,000 to refurbish an old
shop and create the current facility. The firm borrowed 75 percent of the refurbishment
cost at eight percent interest for 11 years. What is the amount of each monthly payment?
(Points : 4)
$91.05
$284.13
$556.50
$682.87
$731.60
0
10000098
MultipleChoice
16
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
0
10000099
MultipleChoice
21
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 13 percent?
Assume annual payments. (Points : 4)
$1078
$1085
$927
$1000
0
10000100
MultipleChoice
23
10. (TCO 6) The market where new securities are offered is called the _____ market. (Points
: 4)
primary
main
secondary
principal
dealer
0
10000101
MultipleChoice
27
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.
0
10000102
MultipleChoice
30
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%
0
10000104
MultipleChoice
33
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
0
10000106
MultipleChoice
34
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
0
10000108
MultipleChoice
37
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.