The weights applied to the various components of a firm’s cost of capital are based on
the current composition of a firm’s capital structure.
A revolving credit agreement is a guaranteed line of credit.
An opportunity cost must be included in the cash flow estimate when using a resource
requires foregoing real or potential alternative income, even though no cash is spent to
obtain the resource.
If a stock’s present dividend is $2.00 and it is expected to grow at a constant annual rate
of 6% with a market- return of 12%, the selling price of the stock today is $33.33.
Liquidity ratios are used to analyze the liquidity of the fixed assets of the firm.
All entries in the accounting books must be made by the last day of the accounting
period so that the firm may close their books.
NASDAQ is the largest exchange in the US.
When valuing a firm’s stocks and bonds, finance professionals place equal significance
on accounting results and cash flows.
A bank line of credit usually requires both interest payments and a commitment fee.
A bond’s yield and coupon rate vary over time depending on market and economic
conditions.
In Modigliani and Miller’s model with taxes and bankruptcy costs, value increases with
leverage due to the “tax shield” created by interest payments. However, this effect is
eventually offset by higher risk and investor concerns about bankruptcy losses should
the firm fail.
In a consolidation the acquiring firm becomes the parent and the target a subsidiary.
A firm’s capital is 40% debt and 60% equity. The company’s cost of debt is 6% while its
cost of equity is 12%. Its cost of capital is 9.6%.
Moon Pie Company is considering automated baking equipment that costs $500,000
installed and would replace the present hand-made production method. The present
equipment has a zero book and salvage value. The new equipment will not increase
revenues but will reduce operating costs from a current level of $600,000 to $300,000
per year. The depreciation of the new equipment will be $73,000 per year. What are the
annual incremental net cash flows? Assume a marginal tax rate of 40 percent.
A.$296,800
B.$136,200
C.$192,200
D.$209,200
Which of the following is true of the underwriting of IPOs performed by investment
banks?
A.The investment bank is prohibited from profiting from the underwriting.
B.The investment bank is not responsible for reselling the purchased shares in the
market.
C.The investment bank commits to buy stock from the issuing company at a fixed price.
D.The investment bank resells the underwritten stock in the market at a discounted
price.
In general, the financial markets provide a vehicle for:
A.the production sector to save money.
B.the consumption sector to spend money.
C.the consumption sector to invest money.
D.the production sector to supply money to the consumption sector.
What is the borrowing rate for a firm that is offered terms of sale of 3/12, net 60 that
does not take advantage of the discount?
A.3.0%
B.15.9%
C.16.5%
D.22.8%
Which of the following would increase the future value of an amount?
A.An increase in the interest rate
B.An increase in the amount
C.An increase in the time until future value is to be received
D.a and b
E.All of the above
What is double taxation?
A.It is when two separate tax authorities tax the same corporation.
B.It is a situation that only affects sole proprietorships.
C.It occurs when the business owner pays himself or herself a salary.
D.It occurs when earnings are taxed once at the corporate level and then taxed a second
time as personal income.
If a country€s currency is expected to get stronger, one would expect the forward rate
(expressed as a direct quote) to ____.
A.sell above the spot rate
B.sell below the spot rate
C.sell on the spot
D.remain steady at the current spot rate
International business has changed from:
A.about 10% to more than 80% of business.
B.import/export to operating full scale businesses in other countries.
C.import/export to operating full scale businesses domestically.
D.we sell there to they sell here.
Find the value of a share of preferred stock that pays $6.00 per year given a return of
16%.
A.$37.50
B.$96.00
C.$2.67
D.$65.00
E.$18.33
You’re the treasurer of Ipswitch Inc. The president has just had the staff produce a
top-down plan that shows great improvements on every issue many of which you
seriously doubt will be achieved. The plan will be shared with securities analysts from
Wall Street shortly. You’re having a private meeting with the bank’s loan officer to plan
next year’s borrowing needs. You should:
A.tell the banker to expect cash flow results in accordance with the official plan,
because if the president hears you said anything else he’ll fire you.
B.tell the banker the president is an optimist and the bank should be ready to lend
Ipswitch a lot more than the plan indicates but you can’t tell exactly how much.
C.look for another job because the president is likely to lay the blame for a cash flow
miss at your door.
D.share some scenario analyses with the banker.
Other things held constant, which of the following will DECREASE the current ratio,
assuming an initial current ratio greater than 1.0?
A.Machinery is purchased using cash
B.Inventory is sold at cost for cash
C.Accounts payables are paid with cash
D.Both a & c
E.None of the above
Which of the following is a part of corporate responsibility provisions of the
Sarbanes-Oxley Act?
A.Brokerage firms analysts must certify that they believe their own reports.
B.CEOs and CFOs must certify the correctness of financial statements.
C.Auditing firms may no longer provide management consulting services.
D.Creation of the Public Company Accounting Oversight Board.
The initial public offerings, or IPOs:
A.do not require the SEC’s final approval of the prospectus.
B.always result in immediate wealth for the executives of the company who have
divested most of their ownership through the offering.
C.represent a very risky subdivision of the general stock market.
D.All of the above
Match the following:
1>Dividend irrelevance theory A. A smaller dividend than expected is viewed as a
negative even if it is an increase over previous dividends.
2>Expectations theory B. Any decrease in a stock’s value from reducing near-term
dividends is offset by increases in future dividends and selling price that come from
additional earnings retained.
3>Bird in the hand theory C. The firm first funds all viable capital budgeting projects,
and then distributes any remaining earnings as dividends.
4>Residual dividend D. The future is uncertain, so cash in management’s hands may not
result in a more valuable company. Therefore a dividend distribution is preferable to
retaining earnings.
The most likely reason for forming a conglomerate is ____.
A.to take advantage of production synergies
B.to acquire additional debt
C.to diversify risk
D.economies of scale
Tammy Smith purchased a call option with a striking price of $40 at a price of $3.50. At
expiration, the stock price has risen to $45.00. What is Tammy’s return on investment?
A.3.75%
B.11.1%
C.12.5%
D.42.9%
Which of the following best describes maturity risk?
A.If interest rates increase, bonds with long maturities will increase in price, but bonds
with short maturities will decrease in price.
B.If interest rates increase, bonds with short maturities will increase in price, but bonds
with long maturities will decrease in price.
C.If interest rates increase, bonds with long maturities will decrease in price more than
bonds with short maturities.
D.If interest rates increase, bonds with short maturities will decrease in price more than
bonds with long maturities.
E.If interest rates increase, bonds with long maturities will increase in price more than
bonds with short maturities.
Based on the concept of supply and demand driving changes in the cost of money
(interest rates), which of the following changes in the economy will tend to increase
interest rates?
A.Investors have decided to save a higher percentage of their income.
B.Business in general is finding fewer opportunities to expand their operations.
C.Investors are insecure about the economy.
D.Both b and c will tend to increase interest rates.
E.All of the above will tend to increase interest rates.
The determination of net cash flows should never include:
A.changes in depreciation.
B.changes in operating costs.
C.interest charges.
D.a and b only