Financial assets are valuable because they give owners rights to future cash flows.
Replacement projects tend to require the same elements as new ventures, but generally
require less new equipment and facilities.
Carrying costs represent those expenses that increase as the level of inventory rises.
The dividend decision is whether to pay cash dividends or retain earnings for growth,
both of which benefit shareholders.
The square of variance is the standard deviation.
The internal rate of return is analogous to the yield on a bond, because both are rates
that equate inflows with outflows on a present value basis.
Altering a firm’s payout ratio can change the timing but not the total amount of
dividends received by stockholders.
The expected return reflects investors’ knowledge of a company that is input to the
Gordon model through the growth rate assumption.
The firm’s cost of capital is the interest rate the firm should use to discount the cash
flows of any proposed capital project.
Corporate controllers are responsible for the accounting functions in most large
corporations.
Stocks, and bonds are long-term investment vehicles. They are similar in that both have
stipulated terms that designate the maturity of the investment.
In an acquisition the acquiring firm can become the parent and the target a subsidiary.
The statement, “you can’t know where you’re going ’till you know where you came
from,” means that the past, with consideration of current information, is usually one of
the best indicators of the firm’s future performance.
Which of the following is not a component used in calculating the cost of capital?
A.The cost of short-term debt
B.The cost of long-term debt
C.The cost of retained earnings
D.The cost of preferred stock
E.The cost of common stock
Bumpstead Inc. is interested in acquiring Blondies Corp. which it has estimated will
generate the following cash flows over the next three years ($000)
In addition, Bumpstead thinks there will be $25,000 per year in synergies available at
no extra cost. Blondies has 50,000 shares outstanding, and its cost of equity is
approximately 14%. If Bumpstead is very conservative, and will not look beyond a
three year time horizon to justify an acquisition, how much should it pay per share for
Blondies stock?
A.$21.95
B.$20.79
C.$23.84
D.None of the above
The SML represents a stable stock market equilibrium in which:
A.investors are happy because their expected and required rates of return are at least
equal.
B.there is not an excess of buyers or sellers and the market remains where it is.
C.a slight disequilibrium with respect to a particular stock produces market forces that
tend to equalize the stock’s expected and required returns through changes in its price.
D.All of the above
The income statement is intended to inform the reader of:
A.the overall financial condition of the firm at a point in time.
B.how much the firm has earned during an accounting period.
C.how much income has been distributed to shareholders.
D.the cash flow generated by the firm over a period of time.
If a call option has zero intrinsic value then:
A.the call option is in the money.
B.the call option is out of the money.
C.the call option has a zero time premium.
D.a put option with the same strike price also has zero intrinsic value.
Allen Company is considering a capital budgeting project that is expected to generate
$100,000 in annual earnings before taxes. Annual depreciation will be $50,000. Allen’s
marginal tax rate is 40%. Determine the project’s annual net cash flows.
A.$150,000
B.$110,000
C.$90,000
D.$60,000
All of the following represent adjustments to the cost of capital components except:
A.the tax effect on debt.
B.the tax effect on equity.
C.floatation costs when issuing preferred stock.
D.floatation costs when issuing common stock.
E.All of the above could represent adjustments to the cost of capital components.
An increase in sales may lead to:
A.a decrease in receivables.
B.a decrease in working capital.
C.an increase in fixed assets.
D.an increase in payables.
Which of the following is most correct?
A.When coupon rates exceed market rates, bonds will sell at a premium.
B.When market rates exceed coupon rates, bonds will sell at a premium.
C.When coupon rates exceed market rates, bonds could sell at either a premium or a
discount.
D.Bonds will always sell at par when the coupon rate equals the market rate.
E.Both a. and d. are correct.
Landmark Hotels is in the hospitality industry. Management is considering acquiring
Wind Flower, a small chain of luxury resorts. In this way, Landmark can save the
expense of starting its own line of resorts from scratch. What kind of a merger will this
be?
A.Horizontal merger
B.Conglomerate merger
C.Strategic merger
D.Financial merger
Petersen, Inc. had the following balances on their balance sheet as of 12/31/20X4 (this
is the complete balance sheet):
a. How much is Petersen’s Net Working Capital as of the balance sheet date?
b. What is Petersen’s Current Ratio?
c. If Net Income for Petersen for 20X4 was $50,000, what was its Return on Assets?
d. If Petersen has Earnings Before Taxes of $30,000 and a TIE Ratio of 7.0. What is its
interest expense?