A real option has a value to the business owner.
There is no constant relationship between the spot and the forward exchange rate for a
currency.
Exchange rate risk can be eliminated with a bank contract for delivery of the foreign
currency when needed at a fixed exchange rate. The process is called pledging because
the bank pledges to accept the exchange rate risk for a fee.
A leveraged buyout is a transaction in which a publicly traded company is converted
into a privately held firm.
An increase in a firm’s annual depreciation expense that results from replacing an
existing asset with a new asset can increase the firm’s annual cash inflows.
The significance of a price/earnings ratio, lies in its comparative and predictive
qualities. Specifically, when a company has an earnings multiple of 15 and the industry
has an earnings multiple of 12, the company’s stock is viewed as outperforming the
industry.
A common method of debt restructuring in bankruptcy is the conversion of debt into
equity.
Spot rates imply delivery of the foreign currency immediately or “on the spot.” In
reality, however, it usually takes about three hours for delivery.
Only incremental, after-tax cash flows are relevant to the evaluation of a capital
budgeting project.
Stock dividends are an effective management tool because they give shareholders the
value equivalent of a cash dividend while conserving cash for capital budgeting
projects.
Investors in growth oriented firms accept the nonpayment of dividends in order to retain
earnings partially because they realize that issuing new equity would involve flotation
costs that would ultimately lower earnings.
The final price of the IPO is set at least a month before the trading begins.
Internal growth is perhaps the most persuasive reason for mergers.
A firm’s overall cost of capital is just the average of the costs of its separate sources of
invested funds.
Northeast Airlines has a current dividend of $1.80. Dividends are expected to grow at
7% into the foreseeable future. What is the firm’s cost of equity from new stock if its
shares can be sold to net the company $46 after administrative expenses (flotation
costs)?
A.10.9%
B.11.2%
C.7.2%
D.None of the above
Atlantis Inc. is considering two mutually exclusive projects with the following cash
flows:
If Atlantis accepts projects that pay back in two years or less, which should be
undertaken?
A.Project A
B.Project B
C.Both projects
D.Neither project
A firm’s preferred stock is selling at $83 and pays a 9.5% annual dividend on a $100 par
value. What is the cost of preferred if flotation costs are 12%?
A.10.64%
B.13.01%
C.10.79%
D.11.45%
The cost of retained earnings can be estimated through the ____ approach.
A.CAPM
B.dividend growth
C.MCC
D.Both a & b
E.All of the above
Contico Corp is evaluating a capital budgeting project and has come up with the
following two-branch decision tree analysis ($000). Contico’s cost of capital is 12%.
What is the project’s NPV?
As part of a share repurchase program, a tender offer involves the:
A.purchase of stock on the open market.
B.purchase of stock directly from its stockholders.
C.private negotiation of purchases from large institutions.
D.a and b
When the return on equity is equal to the return on capital employed:
A.the return on borrowed money equals the cost of borrowing the money.
B.the firm has optimized its financial leverage.
C.the firm is unleveraged.
D.All of the above
Which of the following is the correct mathematical expression of the degree of
operating leverage (DOL)? (Q is the change in volume)
A.DOL = %EBT / %Q
B.DOL = %EBIT / %Q
C.DOL = %Q / %EBIT
D.DOL = %Q / %EBT
Scenario/sensitivity analysis is a procedure that can be used in the capital budgeting
process to indicate how sensitive the ____ is to changes in a particular variable.
A.probability
B.return distribution
C.net present value
D.standard deviation
Dividend payments are categorized as:
A.cash flow from operating activities.
B.cash flow from investment activities.
C.cash flow from financing activities.
D.All of the above
Which of the following statements about the beta coefficient of a stock is true?
A.A beta of > 1 implies that the stock’s volatility is less than that of the market.
B.A beta of < 0 implies that the stock tends to move against the market.
C.A beta of 1 implies a volatility independent of the market’s volatility.
D.A beta of < 1 implies that the stock’s movement is independent of the market.
If $10,000 per year is deposited at 8% starting today and at the beginning of each of the
next five years (6 deposits), the amount on deposit will be:
A.$46,229.
B.$73,359.
C.$49,927.
D.$79,228.
The following is the income statement of a firm.
Its return on sales is:
A.10.4%.
B.9.6%.
C.6.0%.
D.20.0%.
Calculate the effective interest rate of a 2/5, net 25 terms of sale, using a 365-day year.
A.24.5%
B.36.5%
C.42.5%
D.55.5%
Jensen Corporation uses the ABC system of inventory management. It has placed
common bolts in a bin that is accessible to any employees needing these parts. When
the bin gets low, an order is placed with the local hardware distributor to replace this
item. The bolts would be a categorized as a(an) ____ item.
A.A
B.B
C.C
D.JIT
Which of the following must be true for the dividend irrelevance theory to apply?
A.Transaction costs must be small.
B.Floatation costs must be small.
C.Ordinary income and capital gains must be taxed at nearly the same rate.
D.Both a. and c. are correct.
E.All of the above are correct.