A firm should not invest in a capital project unless its NPV exceeds the firm’s cost of
capital.
EBIT measures operating efficiency only, while ROE and EPS measure only financial
efficiency.
The traditional C-corporation, in which the firm’s income is taxed independently of that
of its owners, is overwhelmingly preferred by small companies.
An advantage of the less sophisticated payback method is that it is quick and easy to
apply.
When currency rates are expressed in terms of dollars per unit of foreign currency, it is
called a direct quote.
The dividend irrelevance hypothesis argues that the negative impact on P0of reducing
or eliminating early dividends is offset by the positive effect of larger dividends later on
and an increased selling price.
Because depreciation is a non-cash expense item, it is not necessary to consider
depreciation in estimating cash flows for a new capital project.
Using a higher risk adjusted discount rate makes NPV smaller so projects are less likely
to be accepted. But a higher rate has no effect on the computed value of IRR and
therefore doesn’t make any difference to the likelihood of project acceptance.
For a portfolio made up of three stocks in equal proportion, if stock A’s expected return
is 12%, stock B’s expected return is 16%, and stock C’s expected return is 17%, the
expected return of the portfolio should be 15.0%.
A firm’s correctly computed capital structure consists of 20% debt, 10% preferred stock,
and 70% equity. If new debt of $3 million can be raised at the current interest rate
before a higher yield must be paid to investors, at what point will the MCC break
upward because of the cost of debt?
A.$3,000,000
B.$10,000,000
C.$15,000,000
D.None of the above
Suppose the current dividend for a stock is $0.42 and is expected to grow 20% annually
for the next three years and then 6% annually for the foreseeable future. What will the
dividend be four years from today?
A.$0.42
B.$0.77
C.$0.73
D.cannot determine without a discount rate
The internal rate of return is the rate of interest that makes the present value of a
project’s cash inflows:
A.greater than the present value of its cash outflows.
B.less than the present value of its cash outflows.
C.equal to the present value of its cash outflows.
D.None of the above
How much will you have at the end of 5 years in a European vacation account if you
deposit $200 a month, and the account earns 12 percent compounded monthly?
A.$16,334
B.$15,247
C.$16,497
D.$15,817
The repayment of debt is:
A.an operating activity.
B.an investing activity no matter how the money from the loan was allocated.
C.a financing activity.
D.an investing activity assuming the debt was used for the purchase of a fixed asset.
Effective annual rates decrease as ____ decrease:
A.annual percentage rates
B.number of compounding periods
C.quoted rates
D.All of the above
If a firm has a large quantity of depreciation expense on its income statement, one
would expect:
A.the TIE ratio to be larger than the cash coverage ratio.
B.the fixed charge coverage ratio to be greater than the TIE ratio.
C.the TIE ratio to be smaller than the cash coverage ratio.
D.the fixed charge ratio to be smaller than the cash coverage ratio.
The last dividend paid by Abbot Labs was $1.00. Abbot’s growth rate is expected to be
a constant 8% for three years, after which the growth rate is expected to be 10%.
Investors require a return of 16% on stocks like Abbot. What should the price of
Abbot’s stock be?
A.$15.36
B.$16.36
C.$17.00
D.$17.40
E.$18.40
According to one study done some time ago, most small firms use the _____ method to
evaluate capital projects.
A.NPV
B.IRR
C.payback
D.PI
What is the real rate of interest on a $40,000 loan if $48,000 repays the loan after one
year, given a rate of inflation of 10%?
A.18.6 %
B.24.0%
C.12.0%
D.10.0%
A firm expects next year’s sales to be $108,000,000. Estimate the year-end balance in
accounts receivable if it expects the average collection period to be 42 days.
A.$ 8,200,000
B.$16,400,000
C.$12,600,000
D.$18,800,000
E.$25,200,000
The historic costs of a firm’s capital components are ____ calculating its WACC.
A.not relevant for
B.very useful when
C.necessary for
D.the relevant costs for
Blackstone Inc. has a return on sales of 15%, a total asset turnover of 1.2 and a debt
ratio of 30%. If the company is projecting a dividend payout ratio of 80%, calculate the
firms’ sustainable growth rate.
A.5.15%
B.8.25%
C.10.35%
D.13.45%
You wish to save $500,000 in the next 25 years. You notice that a corporate bond fund
that earns about 11 percent per year and decide to invest in it. How much must you save
each year to obtain your goal?
A.$20,000.00
B.$3,749.98
C.$4,370.13
D.$2,000.00
Credit terms of 1/10, net 30 mean:
A.purchases made between the first and tenth day of the month must be paid by month
end.
B.if the vendor is not paid within 30 days, 1% interest is charged for every 10 days
thereafter.
C.the vendor will grant a discount of 10% for payment within 30 days.
D.the vendor will grant a 1% discount if paid within 10 days; otherwise the bill is due
in full within 30 days.
Gowen, Inc. began the year with equity of $1,000,000 and 100,000 shares of stock
outstanding. During the year the firm paid a dividend of $1.50 per share. Year-end
equity was $1,100,000. Assuming no other factors impacted equity, what was Gowen,
Inc.’s net income for the year?
A.$100,000
B.$150,000
C.$200,000
D.$250,000
E.$300,000
Tribune Company purchases an inventory of paper for $1,000 on credit. All other
working capital items remain the same. The change in net working capital that results
from this transaction is:
A.$1,000.
B.$2,000.
C.zero.
D.$4,000.
E.$5,400.
A firm has a $40 million capital budget limit. Five high IRR projects of about equal size
are available that have initial investments totaling $30M. A sixth project has an IRR
slightly lower than those of the first five, but requires a $16M investment. Several
smaller projects are available with much lower IRR’s. Discuss which projects should be
done using capital rationing thinking.
A zero coupon bond makes no interest payments. How then can it be a bond, which is
simply a loan? What are the peculiar tax implications of zeros?
How does the Du Pont equation help us isolate problems in business performance?
The yield curve, as the term structure of interest rates is said to be normal when it is
upward sloping. However, it is sometimes “inverted” and slopes downward. What
arguments are made to explain why the yield curve is not simply a flat line?
Financial plans are statements of goals as well as predictions of future performance.
Discuss how and why this dual purpose can create problems.