The return on a portfolio of stocks is the average of the returns on the stocks in the
portfolio weighted by the percentage of the portfolio’s value invested in each stock.
The formula for determining the degree of operating leverage is:
DOL = [Q (P – V)] / [Q (P – V) – FC]
The variables have the following meanings and values:
A 5% increase in the firm’s sales will lead to a 20% increase in its EBIT.
Breakeven analysis can provide an insight into the nature and effect of financial
leverage.
The financial plan is essentially a chapter or section of a business plan.
The present value of some expected future sum increases as the interest rate increases.
Accounting is:
A.focused on cash flow.
B.the language of finance.
C.an outgrowth of economics.
D.Both a & b
Assume the following facts about a single product firm:
What is the firm’s annual breakeven volume in sales revenues?
A.$6,000
B.$250,000
C.$150,000
D.$1,500
The following information is available concerning a firm’s capital:
Debt: Bonds with a face value of $1000 and an initial 20-year term were issued five
years ago with a coupon rate of 8% paying semiannually. Today these bonds are selling
for $846.30.
Preferred stock: Preferred stock that pays an annual dividend of $9.50 is trading at
$79.16.
Common equity: The stock is selling for $22.50 per share. An annual dividend of $1.70
was just paid and is expected to grow indefinitely at 6%.
Target capital structure: The firm’s target capital structure is of 30% debt, 20% preferred
stock, and 50% equity.
The firm can issue any type of security without paying floatation costs. The combined
federal and state tax rate is 40%. Calculate the firm’s WACC based on its target capital
structure.
A.9.4%
B.11.2%
C.8.2%
D.12.4%
A firm’s balance sheet discloses cash of $300,000, other assets of $700,000, liabilities of
$500,000, preferred stock of $100,000, common stock of $200,000, and retained
earnings of $200,000. What is the maximum cash dividend the firm can pay?
A.$100,000
B.$300,000
C.$200,000
D.$500,000
To “finance” an asset is:
A.to lend money to buyers so they can improve their portfolios.
B.to sell the asset for more than market value.
C.to raise money in order to acquire the asset.
D.All of these are correct.
Wright Express (WE) has a capital structure that’s 30% debt and 70% equity. The firm
is considering a project that requires an investment of $2.6 million. To finance this
project, WE plans to issue 10-year bonds with a coupon rate of 12% and a yield to
investors of 12.4%. If the current risk-free rate is 7% and the expected market return is
14.5%, what is Wright’s WACC if its beta is 1.2 and it is subject to a marginal tax rate
of 40%.
A.14.9%
B.12.4%
C.13.4%
D.16.0%
Which of the following is true of the financial plan in a reasonably well managed
company?
A.The plan should ideally follow the aggressive optimism strategy.
B.The plan should establish measurable goals which result in bonus compensation if
achieved.
C.Its stretch goals serve as targets toward which the organization strives and always
achieves.
D.Its stretch goal faces a risk of overstating achievable performance because of the
bottom-up phenomenon.
An investment banker is generally thought to be qualified to advise a corporation on a
variety of matters, including all the following except:
A.long range financial planning.
B.the marketing of securities.
C.the timing of securities.
D.the firm’s new product marketing decisions.
If a firm receives bad news about its future earnings prospects, what should happen to
the stock price in order to maintain the required return desired by new investors?
A.The stock price should increase.
B.The stock price should decrease.
C.The stock price remains unchanged.
D.The stock price remains the same, but dividends will decrease.
If a company uses a bond issue to raise capital, the financing is an example of:
A.equity financing.
B.debt financing.
C.lease financing.
D.debt and equity financing.
Although preferred stock is legally a form of equity, it is often referred to as a hybrid
security:
A.because it has characteristics of both long-term debt and equity.
B.so in the context of the cost of capital, it is viewed as a third component.
C.it is considered as debt.
D.Both a and b
A decrease in a firm’s inventory should decrease:
A.carrying costs.
B.sales.
C.ordering costs.
D.a and b
E.All of the above
If the direct quote, forward exchange rate is higher than the spot rate, the forward
currency is trading at a:
A.spot rate.
B.discount.
C.premium.
D.forward spot rate.
Which of the following led to the end of private equity dominated merger activities in
2008?
A.Concern about hostile take overs
B.The continued response to the terrorist attacks of September 11, 2001
C.A general increase in the rate of globalization
D.A lack of availability of financing
If a country€s currency is expected to get weaker, this will ____.
A.encourage exports
B.encourage imports
C.not affect trade
D.discourage both imports and exports
Most financial ratios are formed from sets of financial statement figures. Which of the
following ratios are not?
A.Cost ratio
B.Current ratio
C.P/E ratio
D.Market/book ratio
E.Both c and d
If you purchase a 10 year bond today with the intention of selling it a year from today,
you would like the yield to maturity to ____.
A.equal the coupon rate
B.not change
C.increase
D.decrease
If a firm has no debt, then ROA is ____ ROE.
A.less than
B.equal to
C.greater than
D.not comparable to
The Danville Company is considering a $50 million expansion (capital expenditure)
program next year. Next year, the company expects to earn $25 million after interest
and taxes. The company also plans to increase its dividends from $5 million to $7
million. If the expansion program is accepted, the company expects working capital
requirements to increase by approximately $8 million next year. Long-term debt
retirement obligations total $3 million next year and depreciation is expected to be $13
million. No fixed assets are expected to be sold next year. How much additional
financing will be needed if the expansion program is undertaken?
A.$30 million
B.$43 million
C.$32 million
D.$22 million
Your bank balance is exactly $10,000. Three years ago you deposited $7,938 and have
not touched the account since. What annually compounded rate of interest has the bank
been paying?
A.8.65%
B.26.00%
C.8.00%
D.6.87%
Appleton’s capital accounts are as follows
The firm expects to earn $120,000 next year and generally pays 40% of its earnings out
in dividends. It also plans capital spending of $200,000. How much capital will have
been raised when the MCC makes its first break upwards?
Janet Lee is considering purchasing shares in DM Designs. The share price is currently
$64. Alternatively, Janet can buy an out of the money call option with a striking price of
$65, that is currently priced at $2.25. Janet expects the stock price to rise to $68. What
is the difference between the stock’s return on investment and the option’s return on
investment?
Alasco Inc.’s fixed operating costs are $20.8 million and its variable cost ratio is 0.30.
The firm has $10 million in bonds outstanding with a coupon interest rate of 9%.
Revenues are $32.2 million. Compute Alasco’s degree of total leverage (DTL).
Jim Dolt wants to borrow $50,000 to buy a house. If he paid equal annual installments
for 30 years and 12 percent interest on the outstanding balance, what would be the
amount of his annual payment?
Lavender Inc. is thinking about acquiring Scarlet Corp. After all benefits, synergies and
tax effects, Lavender’s management has estimated that the incremental cash flows from
the acquisition will be as follows
They have also estimated the project’s discount rate, appropriately adjusted for risk, at
12%.
Scarlet is a privately owned firm with 50,000 shares of stock outstanding. How much
should Lavender be willing to pay per share?
Jan bought a stock at $70 per share and sold it for $84. While she owned it, she received
a $5 per share dividend. What was her percentage return?
Appleton Inc. wants to acquire Gentronix Corp., but its offer of a friendly merger has
been rejected. Gentronix’s board of directors includes six of the firm’s top managers
who together own 40% of its stock. Is a hostile takeover bypassing the board likely to
succeed?
The projected cash flows for a project are:
If the firm’s cost of capital is 12%, what are the project’s net present value and internal
rate of return?