In terms of the capital budgeting process, net cash flows are:
A.the net cash outlays required to place a project in service.
B.the funds invested in additional assets.
C.incremental changes in a firm’s cash flow.
D.the outlays that have already been made.
The first step in capital budgeting is to:
A.reduce the project to a series of cash flows.
B.determine the difficulty of a project.
C.compare competing alternatives.
D.reduce projects to their simplest form.
Which type of project is it most difficult for a firm to find a risk adjusted rate?
A.Replacement projects
B.Small expansion projects
C.New venture related to the firm€s existing operations
D.New venture not related to the firm€s current operations
The price at which a merger target’s stock is acquired virtually always reflects a
premium over its pre-merger market value because:
A.the acquirer is trying to fairly divide the gain it will make on the acquisition between
its own stockholders and the target’s.
B.it takes a substantial premium to get a large number of shareholders to sell at one
time.
C.the combined firm generally has an increased value because of additional leverage.
D.the acquirer wants the target’s shareholders to be happy about the merger because
they will be among its shareholders after the transaction.
Allegheny Valley Power Company common stock has a beta of 0.80. If the current
risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%,
determine the cost of retained earnings for the firm (using the CAPM).
A.14.1%
B.7.6%
C.6.5%
D.None of the above
Which of the following is part of the finance department?
A.Quality control
B.Purchasing
C.Treasury
D.Marketing
A firm that’s subject to a 40 percent tax rate has debt of $60M, equity of $140M, and no
preferred stock. What is the firm’s cost of capital (WACC) if its pretax cost of new debt
is 12 percent, the pretax cost of its old debt is 8%, and its cost of equity is 14.5 percent?
A.13.75%
B.11.59%
C.12.31%
D.None of the above
A DECREASE in Cash Flow from Operations could be caused by:
A.a decrease in land.
B.an increase in inventory.
C.a decrease in accruals.
D.Both b and c
E.All of the above
The least precisely known capital component cost is:
A.debt, because the tax effect confuses things.
B.preferred stock, because it’s not used by many companies and people aren’t familiar
with it.
C.equity because its future cash flows are uncertain.
D.they’re all known with about the same level of certainty.
Which of the following is not a cost of carrying inventory?
A.Breakage and theft
B.Obsolescence
C.Financing and storage costs
D.Slower inventory turnover
The following data is associated with a proposed replacement project:
A machine that originally cost $25,000 has a book value of $12,500 and a current
market value is $15,000. A new machine costs $40,000 and has a projected economic
life of five years. The corporate tax rate is 34%. The initial after-tax cash outlay,
assuming the old machine is sold at its current market value, is:
A.($30,000.)
B.($30,850.)
C.($25,850.)
D.($24,150.)
Analysts expect a stock to be selling for $22 in one year. It is also expected to pay a $1
dividend during the year. If you require a 15% return on this kind of investment, what is
the most you can pay for the stock today?
A.$21.00
B.$18.70
C.$20.00
D.None of the above
Depreciation, from an accounting viewpoint, can best be thought of as:
A.accounting for the physical deterioration of an asset.
B.writing off assets like patents, trademarks, and copyrights.
C.matching the carrying value of the asset with the estimated net realizable value of the
asset.
D.allocating the cost of the asset to the periods in which it gives service.
A cash flow projected today for a future period of time is a:
A.present value of a single sum.
B.future value of a single sum.
C.present value of an annuity.
D.future value of an annuity.
PDQ stock has a required return of 20%. The expected market return is 15% and the
risk-free rate is 5%. Calculate the beta of PDQ stock.
A.1
B.1.5
C.2
D.2.5
E.3
The tax schedule for married couples filing jointly:
A.Results in less tax than would be paid by a single person if only one spouse works.
B.Saves on taxes regardless of whether one or both spouses work.
C.Results in most two income families paying more tax than if they were single.
D.a and c
Terms of sale of 2/10 net 30 mean:
A.the buyer may take a 10% discount if payment is made within two days of receiving
the bill.
B.a 10% penalty is due of the bill is not paid within two days of the due date which is in
30 days.
C.the buyer may take a 2% prompt payment discount if the bill is paid within 10 days,
should pay in 30 days, and will be liable for a 2% penalty if payment isn’t made in 30
days.
D.the buyer is borrowing money at 36.5% if it fails to take the prompt payment
discount offered.
T. Corporation has a standard deviation on its common stock of 75 percent and a
correlation with market returns of 0.40. The market’s standard deviation and expected
return are 15 percent and 14 percent, respectively, and the risk-free rate of return is 8
percent. Calculate T. Corporation’s required rate of return.
A.1.867%
B.9.867%
C.19.20%
D.14.06%
Charlie Company is expected to grow at an annual rate of 6% indefinitely. The return
on similar stocks is currently 11%. Charlie’s board of directors declared a dividend of
$1.85 yesterday. What should a share of Charlie Company sell for?
A.$39.22
B.$37.00
C.$16.82
D.$17.83