In addition to justifying how capital dollars are spent, capital budgeting provides a basis
for choosing among alternative capital projects.
The cash conversion cycle is the time it takes to convert a receivable into cash.
A decrease in accounts payable is categorized as a use of funds.
The only reason for the difference between the effective cost of capital and investors’
returns is the tax effect of interest payments, which reduces the firm’s cost of debt.
Estimating a firm’s component cost of common equity by means of the dividend growth
or Gordon model requires a forecast of the market’s expectations about the long-term
growth rate in dividends.
The present value of an annuity is equal to the sum of the present values of each of the
cash flows in the annuity.
Banks like to make self-liquidating loans because they usually command higher interest
rates than other loans.
Firms often offer shareholders the option of receiving new shares instead of cash
dividends. Such a plan has the advantage of raising new equity without incurring
flotation costs.
A decision that increases immediate net profit is always consistent with maximizing
shareholder wealth.
“Capital restructuring” is the term applied to the process of retiring an old, high interest
bond issue and replacing it with a new lower interest issue.
In widely held companies, what percentage ownership is generally enough for effective
control if no one else owns more than a few percent?
A.15%-25%
B.50.1%
C.30%-40%
D.5%-10%
Use the following information to calculate Overland’s expected return.
A.16%
B.14%
C.12%
D.10%
Companies A and B combine to form Company X and cease to exist as separate entities.
This is an example of ____.
A.a merger
B.an acquisition by Company A
C.a consolidation
D.an acquisition by Company B
You want to purchase a beach house for $220,000 funding as much of the cost as
possible with a home mortgage loan. Banks are currently offering standard thirty year
mortgages at 8% (monthly compounding). Unfortunately, you can only afford payments
of $1,500 per month. How much cash will you need for a down payment in order to buy
the home? (Round to the nearest dollar)
A.$11,142
B.$13,778
C.$15,575
D.$17,457
Economies of scale in production and distribution would generally be highest in:
A.vertical mergers.
B.product extension mergers.
C.horizontal mergers.
D.any form of merger.
Only _____cash flows count in relation to a project under consideration.
A.incremental
B.marginal
C.fractional
D.subsidiary
If you invest 80% of your funds in GTE stock with an expected rate of return of 11%
and the remainder in International Paper stock with an expected return of 16%, the
expected return on your portfolio is:
A.11.8%.
B.12%.
C.12.6%.
D.13.5%.
E.None of the above
Risk aversion means:
A.investors prefer less risk when expected returns are equal.
B.investors always choose low risk stocks.
C.gamblers don’t behave rationally.
D.investors avoid risk at all costs.
Illinois Tool Company’s (ITC) fixed operating costs are $1,260,000. Its variable costs
average 70% of the price of its products. The firm currently has sales revenue of $9
million per year. What is ITC’s degree of operating leverage?
A.1.60
B.1.875
C.3.0
D.None of the above
The primary financial goal of a corporation is to maximize:
A.shareholders wealth.
B.earnings per share.
C.stock price.
D.Both a & c
E.All of the above
A bank’s ____ is the rate it charges its largest and most creditworthy corporate
customers.
A.risk-free rate
B.commitment fee
C.prime rate
D.nominal rate
Which of the following represents spontaneous financing?
A.The origination of a 9-month bank loan
B.The issuance of a note payable with a maturity of less than one year
C.An increase in accounts payable resulting from the purchase of inventories on 30-day
credit
D.a and c
E.All of the above
Which of the following are typical planning assumptions?
A.A 10% increase in sales
B.An increase in interest rates from 9% to 11%
C.A decrease in the firm’s inventory turnover from 3x to 2x
D.All of the above