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1) Hernandez Corporation expects to have the following data during the coming year. What is Hernandez’s expected ROE? Assets$200,000Interest rate8% D/A65%Tax rate40% EBIT$25,000 a.12.51% b.13.14% c.13.80% d.14.49% e.15.21% 2) A firm wants to strengthen its financial position. Which of the […]

1) Zumbahlen Inc. has the following balance sheet. How much total operating capital does the firm have? Cash$ 20.00Accounts payable$ 30.00 Short-term investments50.00Accruals50.00 Accounts receivable20.00Notes payable 30.00 Inventory 60.00 Current liabilities$110.00 Current assets$150.00Long-term debt70.00 Gross fixed assets$140.00Common stock30.00 Accumulated deprec. […]

1) If you plotted the returns on a given stock against those of the market, and if you found that the slope of the regression line was negative, the CAPM would indicate that the required rate of return on the […]

1) Which of the following should not influence a firm’s dividend policy decision? a. A strong preference by most shareholders for current cash income versus capital gains b. Constraints imposed by the firm’s bond indenture c. The fact that much […]

1) An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time. 2) A line of credit can be either a formal or an […]

1) If a firm is privately owned, and its stock is not traded in public markets, then we cannot measure its beta for use in the CAPM model, we cannot observe its stock price for use in the DCF model, […]

1) The basic earning power ratio (BEP) reflects the earning power of a firm’s assets after giving consideration to financial leverage and tax effects. 2) When deciding whether or not to take a trade discount, the cost of borrowing from […]

1) Refer to Exhibit 3.1. What is the firm’s days sales outstanding? Assume a 360-day year for this calculation. a. 48.17 b. 50.71 c. 53.38 d. 56.19 e. 59.14 2) Refer to Exhibit 3.1. What is the firm’s inventory turnover […]

1) If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that a. the dividend payout ratio is increasing b. no dividends were paid during the year c. the dividend payout ratio […]

1) Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse. 2) Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its […]

1) Firms with high capital intensity ratios have found ways to lower this ratio permitting them to achieve a given level of growth with fewer assets and consequently less external capital. For example, just-in-time inventory systems, multiple shifts for labor, […]

1) A 15-year bond has an annual coupon rate of 8%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 6%. Which of the following statements is CORRECT? a.The bond is […]

1) A conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities. 2) Portfolio A has but one security, while Portfolio B has 100 securities. Because of diversification […]

1) The cost of equity raised by retaining earnings can be less than, equal to, or greater than the cost of external equity raised by selling new issues of common stock, depending on tax rates, flotation costs, the attitude of […]

1) If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock’s expected total return for the coming year? a.7.54% b.7.73% c.7.93% d.8.13% e.8.34% 2) Which of the following statements is CORRECT? a. […]

1) Which of the following statements is CORRECT? a.The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects b.The discounted payback method is generally regarded by academics as being the best […]

1) Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project? a.Shipping and installation costs b.Cannibalization effects c.Opportunity costs d.Sunk costs that have been expensed for […]

1) The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant. 2) Firms raise capital at the total corporate level by retaining earnings and by obtaining […]

1) Which of the following statements is CORRECT? a. Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% […]

1) Which of the following statements is CORRECT? Assume that all projects being considered have normal cash flows and are equally risky. a.If a project’s IRR is equal to its WACC, then under all reasonable conditions, the project’s IRR must […]

1) Ziebart Corp.’s EBITDA last year was $390,000 ( = EBIT + depreciation + amortization), its interest charges were $9,500, it had to repay $26,000 of long-term debt, and it had to make a payment of $17,400 under a long-term […]

1) ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers. 2) When evaluating mutually exclusive projects, the modified IRR (MIRR) always leads to the same capital budgeting decisions as […]

1) The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation. 2) An increase in any current asset must be accompanied by an equal increase in […]

1) The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends received by a corporation may be excluded from the receiving corporation’s taxable income. 2) Underlying the dividend irrelevance theory proposed […]

1) Taylor Inc., the company you work for, is considering a new project whose data are shown below. What is the project’s Year 1 cash flow? Sales revenues, each year$62,500 Depreciation$8,000 Other operating costs$25,000 Interest expense$8,000 Tax rate35.0% a.$25,816 b.$27,175 […]

1) Murray Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favors the NPV method. […]

1) Your consultant firm has been hired by Eco Brothers Inc. to help them estimate the cost of common equity. The yield on the firm’s bonds is 8.75%, and your firm’s economists believe that the cost of common can be […]

1) “Capital” is sometimes defined as funds supplied to a firm by investors. 2) One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit. Answer: T Answer: T

1) The regular payback method is deficient in that it does not take account of cash flows beyond the payback period. The discounted payback method corrects this fault. 2) The interest and dividends paid by a corporation are considered to […]

1) Freedman Flowers’ stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return. What is the firm’s expected rate of return? a.9.41% b.9.65% […]

1) In your first job with TBL Inc. your task is to consider a new project whose data are shown below. What is the project’s Year 1 cash flow? Sales revenues$22,250 Depreciation$8,000 Other operating costs$12,000 Tax rate35.0% a.$8,903 b.$9,179 c.$9,463 […]

1) Shannon Co. is considering a project that has the following cash flow and WACC data. What is the project’s discounted payback? WACC:10.00% Year01234 Cash flows-$950$525$485$445$405 a.1.61 years b.1.79 years c.1.99 years d.2.22 years e.2.44 years 2) Which of the […]

1) Which of the following statements is CORRECT? a.We should use historical measures of the component costs from prior financings that are still outstanding when estimating a company’s WACC for capital budgeting purposes b.The cost of new equity (re) could […]

1) Cornwall Corporation is planning to raise $1,000,000 to finance a new plant. Which of the following statements is CORRECT? a.If debt is used to raise the million dollars, but $500,000 is raised as first mortgage bonds on the new […]

1) Refer to Exhibit 3.1. What is the firm’s TIE? a. 1.94 b. 2.15 c. 2.39 d. 2.66 e. 2.93 2) You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the WACC. Which of the […]

1) When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio’s […]

1) The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm’s stock price. 2) When considering two mutually exclusive projects, the firm should always select the project whose internal rate of return is […]

1) McCurdy Co.’s Class Q bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid semiannually (2.875% each 6 months), and those bonds sell at their par value. McCurdy’s Class P bonds have the same risk, maturity, […]

1) Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk. 2) It is appropriate to use […]

1) The text identifies three methods for estimating the cost of common stock from reinvested earnings (not newly issued stock): the CAPM method, the DCF method, and the bond-yield-plus-risk-premium method. Since we cannot be sure that the estimate obtained with […]

1) Firms hold cash balances in order to complete transactions (both routine and precautionary) that are necessary in business operations and as compensation to banks for providing loans and services. 2) Net working capital is defined as current assets divided […]

1) The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, while the income statement measures the firm’s financial position at a point in time. 2) A firm that […]

1) For a stock to be in equilibrium, two conditions are necessary: (1) The stock’s market price must equal its intrinsic value as seen by the marginal investor and (2) the expected return as seen by the marginal investor must […]

1) If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget. Therefore, the better the firm’s investment opportunities, the lower its payout ratio should be. 2) The retained earnings account on […]

1) The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the […]

1) Daylight Solutions is considering a recapitalization that would increase its debt ratio and increase its interest expense. The company would issue new bonds and use the proceeds to buy back shares of its common stock. The company’s CFO thinks […]

1) If a firm’s projects differ in risk, then one way of handling this problem is to evaluate each project with the appropriate risk-adjusted discount rate. 2) If the market is in equilibrium, then an option must sell at a […]

1) Tibbs Inc. had the following data for the year ending 12/31/12: Net income = $300; Net operating profit after taxes (NOPAT) = $400; Total assets = $2,500; Short-term investments = $200; Stockholders’ equity = $1,800; Total debt = $700; […]

1) Long-term loan agreements always contain provisions, or covenants, that constrain the firm’s future actions. Short-term credit agreements are just as restrictive in order to protect the interest of the lender. 2) The slope of the SML is determined by […]

1) Which of the following statements is CORRECT? a.Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm’s common stock, and, as a result, the expected after-tax yield on the preferred is lower […]

1) Which of the following statements is CORRECT? a.If a firm’s assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm’s AFN to be negative b.If a firm […]