Accelerated depreciation follows the half-year convention. That is, assets receive a
half-year of depreciation in the 1st year and the remaining half-year of depreciation in
the T+1 year where T is the designated life of the asset.
A firm’s financial leverage is a direct function of the ratio of net income to sales.
Fundamental analysis attempts to develop an intrinsic value for a stock that is then
compared with its current price.
Accounting and finance have consistent orientations about financial results.
Holding all other variables constant, an increase in the discount rate would increase a
present value.
The present value factor is also known as the discount factor.
With a stock’s present dividend at $2.00, a market return of 12%, and a selling price
today of $30.00, a constant growth stock’s growth rate is 5%.
Present value calculations assume that an investor always prefers an investment’s
present value to its future cash flows.
Typically, until the market has responded favorably to an IPO, mutual funds and other
institutional investors wait on the sidelines before buying the stock.
Shareholder needs or preferences that may influence the dividend decision include:
A.the need for current income support oneself.
B.a preference for price appreciation because current income isn’t needed.
C.a preference for capital gains over ordinary income.
D.All of the above
If a vendor’s invoice states terms of sale of 1/10 net 30, and the buyer fails to take the
prompt payment discount, it is effectively borrowing money at an annual rate of:
A.18.25%.
B.1.0%.
C.12%.
D.36.5%.
The directors of Almond and Sons met on Friday, February 5. They declared that the
first-quarter dividend was to be paid on Friday, April 9, with a record date of Friday,
March 12. When is the ex-dividend date?
A.February 5
B.March 10
C.March 12
D.April 9
Floatation costs do not affect the cost of capital in regard to ____.
A.new equity
B.new preferred stock
C.retained earnings
D.new common stock
Which of the following forms of compensating balance has a less severe effect on the
borrower?
A.Line of credit
B.Average balance
C.Minimum balance
D.Revolving credit
Find the present value of $100 to be received at the end of two years if the discount rate
is 12% compounded monthly.
A.$66.50
B.$78.76
C.$68.80
D.$91.80
E.$79.75
Illinois Tool Company’s (ITC) degree of total leverage (DTL) is 3.00 at a sales volume
of $9 million. Determine ITC’s percentage change in earnings per share (EPS) if
forecasted sales increase by 20 percent to $10,800,000.
A.60%
B.50%
C.32%
D.None of the above
Use the following information for the next three questions: Nelson, Inc. is considering
two mutually exclusive projects. Project A is three years long with an initial cash
outflow of $10,000 and expected annual inflows of $4,500. Project B is six years long
with an initial cash outflow of $18,000 and annual cash inflows of $5,000. The cost of
capital is 8%.a. What is the NPV of the replacement chain for Project A (extending it to
six years)?
a. $ 619
b. $1,106
c. $1,597
d. $2,865
e. $5,114b. What is the equivalent annual annuity (EAA) for the preferred project (A or
B)?
a. $ 619
b. $1,106
c. $1,597
d. $2,865
e. $5,114c. Which of the projects should be selected and why?
a. Project B because its NPV is higher than project A’s replacement chain NPV
b. Project A because it has a higher replacement chain NPV
c. Project B because it has a higher IRR
d. Project A because it has a higher EAA
e. Project B because it has a higher replacement chain NPV
A firm has the following investment opportunities:
If the cost of capital is 10% and the capital budget is limited to $280,000, which
project(s) should the firm undertake?
A.Project A, B, and C
B.Project A and C
C.Project A and B
D.Project A, B, and D
The following data is associated with a proposed replacement project:
A machine that originally cost $25,000 and has been depreciated straight line has two
years of its expected 5-year life remaining. Its current market value is $15,000. The
corporate tax rate is 34%. The cash flow from disposing of the old machine is:
A.$10,000.
B.$15,000.
C.$13,300.
D.$8,250.
Viewing a repurchase as an investment involves comparing:
A.the earnings per share of the stock with its repurchase price.
B.the repurchase price with the stock’s market price a year after repurchase.
C.the repurchase price with the stock’s market price at the time of repurchase.
D.the gains during the year of repurchase with the profits earned during the next year.