Only project cash flows that are incremental to the rest of the business are relevant for
capital budgeting purposes.
Transaction costs tend to make tailoring an income stream impractical.
Companies sometimes create liabilities that exceed their assets when they lose a
lawsuit.
An initial debt or equity offering is made in the primary market. Subsequent trading of
debt takes place in either primary or secondary markets; while subsequent trading in
equity is done in secondary markets.
The acid-test ratio is normally smaller than the current ratio for a firm.
Modern techniques are very good at incorporating risk into capital budgeting.
According to the incremental cash flow principle, a firm should include both variable
costs and fixed costs in the project’s cash flows.
Borrowing cannot increase the value of equity because it always adds risk and
stockholders are risk averse.
Forecasts are projections of where the financial momentum of a business will carry it
over a short period. They usually consist almost entirely of financial numbers without
much supporting verbiage.
The tax system taxes capital gains more aggressively than ordinary income.
If stockholders have a preference for divided income, the optimal dividend policy is to
treat dividends as a residual.
Relaxation of credit policy normally involves an expansion of investment in accounts
receivable.
Free trade implies that businesses are at liberty to market their products in other
countries as well as in their own.
Which of the following best describes the financial link between stockholders and
bondholders?
A.The action of stockholders cannot affect the financial position of bondholders.
B.The action of stockholders can increase the risk of a business which will affect the
financial position of bondholders.
C.The action of bondholders can increase the risk of a business which will affect the
financial position of stockholders.
D.The actions of stockholders and bondholders are independent.
E.Both a. and c. are correct.
All of the following are characteristics of preferred stock that make it similar to bonds
except:
A.constant periodic payments.
B.ahead of common stock with respect to dividends.
C.no voting rights.
D.periodic payment is tax deductible to the paying company.
E.All of the above characteristics make preferred stock similar to bonds.
Business risk is associated with ____.
A.leverage
B.the interest on debt
C.the level of equity
D.the operating performance
Khandker Motors finances 40% of its total capital with debt. The cost of debt is 11%.
The firm is in the 37% tax bracket and earned an operating profit of $2.5 million
dollars. If the Khandker’s total capital amounts to $22 million and its book value per
share is $20, what are the firm’s earnings per share?
A.$0.85
B.$0.88
C.$1.43
D.$1.46
Which of the following is not an example of a source of systematic or market risk?
A.Interest rate changes
B.Foreign competition with an industry’s products
C.Changes in the overall economic outlook
D.Changes in the inflation rate
The purpose of a stock dividend is to:
A.avoid the taxes associated with a stock repurchase plan.
B.keep the price in a trading range so it’s accessible to small investors.
C.immediately increase shareholder wealth.
D.send a positive signal when the firm can’t afford to give stockholders cash.
A $1,000, 10% coupon rate bond with 10 years remaining until maturity is selling for
$788.10. Its yield to maturity at this price is:
A.7.00%.
B.10.00%.
C.14.00%.
D.None of the above
____ generally involves the use of power by one group to gain a benefit at the expense
of others.
A.Unethical behavior
B.Shareholder wealth maximization
C.Limited liability
D.A personal guarantee
Which of the following is an advantage of the certainty equivalent approach?
A.It allows decision makers to recognize particularly risky years.
B.It uses the cost of capital as the appropriate discount rate which is easier to calculate.
C.It uses regression analysis which gives a certain estimate of cash flows.
D.It uses computer simulation methods which makes a precise prediction of cash flows.
With a market yield on preferred stock of 8% and a proposed annual dividend rate of
7.5% on a $100 par value, what is the component cost of capital for a new preferred
stock issue if flotation costs of 16% are assumed?
A.8.93%
B.9.28%
C.9.52%
D.8.70%
Which of the following is TRUE?
A.A bond’s price moves to par value as it approaches maturity.
B.The shorter a bond has to maturity, the less sensitive the bond’s price is to changes in
market interest rates.
C.The longer a bond has to maturity, the more sensitive the bond’s price is to changes in
market interest rates.
D.Both b & c
E.All of the above
Raising money and handling financial relationships with outsiders is a function of the:
A.controller.
B.treasury department.
C.accounting department.
D.All of the above
EBIT, earnings before interest and taxes, is also called:
A.operating income.
B.net income.
C.financial income.
D.revenue.
Which of the following can impact exchange rates?
A.Changes in consumer preferences
B.Government imposed tariffs.
C.Changing economic conditions
D.Differences in interest rates in the two countries
E.All of the above can impact exchange rates.
The expected return on a stock is:
A.based upon the perception of the investor.
B.the return investors feel is most likely to occur based upon currently available
information.
C.the return that is guaranteed by an investment.
D.similar to like investments than other investments return.
Nash, Inc. is looking at a 4-year project that will cost $4 million to initiate. Based on a
range of economic forecasts, Nash has forecasted a worst case, best case and most
likely case with respect to cash flows that this project will generate and assigned
probabilities to these forecasts. The worst case forecast (30% probability) is $1.2
million per year. The best case (20% probability) is $1.8 million per year with an
additional $1 million in the fourth year. The most likely forecast (50% probability) is
$1.5 million per year with an additional $0.5 million in the fourth year. The cost of
capital is 14%.
a. What is the NPV ($000) of the worst case scenario?
b. What is the NPV ($000) of the best case scenario?
c. What is the NPV ($000) of the most likely scenario?
d. What should Nash use to approximate the expected NPV ($000) of the project?
A firm’s target capital structure is a mix of components that management considers:
A.marginally beneficial and attempts to maintain if doing so is relatively easy.
B.one of several fairly beneficial structures.
C.optimal and strives to maintain.
D.of little interest because there’s no reason one structure should be any better than
another.
The ____ is a statistical measure of the mean or average value of the possible outcomes.
A.probability distribution
B.standard deviation
C.expected value
D.coefficient of variation